consider an opportunity in which you can apply the key concepts of Strategic Planning and
Strategy Management. For instance, you can describe a situation at work in which you applied
the use of the Strategic Planning Process. Or you can describe how you would use the Balanced
Scorecard Framework to develop and manage a new strategy for an organization. It would be
especially useful to include in your assessment of the environment, your plan for implementing
the suggested change, and an evaluation of what did (or might) work well and what did not (or
might not) work well.
5 pages
STRATEGIC MANAGEMENT
O F H E A LT H C A R E
ORGANIZATIONS
SEVENTH EDITION
STRATEGIC MANAGEMENT
O F H E A LT H C A R E
ORGANIZATIONS
PETER M. GINTER
University of Alabama at Birmingham
W. J A C K D U N C A N
University of Alabama at Birmingham
L I N D A E . S WAY N E
University of North Carolina at Charlotte
© 2013 Peter M. Ginter, W. Jack Duncan, Linda E. Swayne
Under the Jossey-Bass imprint, Jossey-Bass, 989 Market Street, San Francisco CA 94103-1741, USA
www.josseybass.com
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Library of Congress Cataloging-in-Publication Data
Ginter, Peter M.
Strategic management of health care organizations / Peter M. Ginter, W. Jack Duncan,
Linda E. Swayne. — 7th ed.
p. cm.
Rev. ed. of: Strategic management of health care organizations / Linda E. Swayne,
W. Jack Duncan, Peter M. Ginter. 6th ed. c2008.
Includes bibliographical references and index.
ISBN 978-1-118-46646-9 (hardback) — ISBN 978-1-118-46674-2 (ebk) — ISBN 978-1-118-46672-8
(ebk) — ISBN 978-1-118-46673-5 (ebk)
I. Duncan, W. Jack (Walter Jack) II. Swayne, Linda E. Strategic management of health care
organizations. III. Title.
[DNLM: 1. Health Services Administration. 2. Health Planning—organization & administration.
3. Organizational Innovation. W 84.1]
362.1068—dc23
2012043408
A catalogue record for this book is available from the British Library.
ISBN 978-1-118-44646-9 (hardback)
ISBN 978-1-118-46672-8 (ebk)
ISBN 978-1-118-46674-2 (ebk)
ISBN 978-1-118-46673-5 (ebk)
Cover design: Cylinder
Set in 10/12 pt ITC Garamond Std by MPS Limited, Chennai, India
Printed in the USA by Malloy Lithography, Ann Arbor, MI, USA
CONTENTS
Preface
vii
Chapter 1
The Nature of Strategic Management
Chapter 2
Understanding and Analyzing the General
Environment and the Health Care Environment
33
Chapter 3
Service Area Competitor Analysis
75
Chapter 4
Internal Environmental Analysis and Competitive
Advantage
127
Chapter 5
Directional Strategies
165
Chapter 6
Developing Strategic Alternatives
205
Chapter 7
Evaluation of Alternatives and Strategic Choice
255
Chapter 8
Value-Adding Service Delivery Strategies
307
Chapter 9
Value-Adding Support Strategies
345
Chapter 10
Communicating the Strategy and Developing
Action Plans
383
Appendix A
Analyzing Strategic Health Care Cases
411
Appendix B
Health Care Organization Accounting,
Finance, and Performance Analysis
423
Health Care Acronyms
443
Appendix C
Index
1
451
v
P R E FA C E
More than two decades ago, the three of us agreed that health care was experiencing evolutionary, and in some segments revolutionary, change. At that time,
we wrote in the Preface of the first edition that clearly 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 a structured strategic management approach that recognized the value
of emergent thinking could make sense of such a rapidly changing environment.
Our only surprise has been that the rate of change in the health care environment has been even greater than we imagined.
Today, health care organizations have almost universally embraced strategic
management as first developed in the business sector and now have developed
strategic management processes that are uniquely their own. Health care leaders
have found that strategic thinking, planning, and managing strategic momentum are essential for coping with the dynamics of the health care industry and
strategic management has become the single clearest manifestation of effective
leadership in health care organizations.
In the broadest terms, this text is about leadership; more narrowly, it concerns
the essential strategic tasks of leading and managing health care organizations.
As a result, the seventh edition continues to advocate the importance of strategic thinking and clearly differentiates strategic thinking, strategic planning, and
managing strategic momentum. These concepts represent the central elements
of a complete strategic management process that we believe reflects 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 managing strategic momentum. Through the management
of the strategic plan, new insights and perspectives emerge and strategic thinking, planning, and managing are reinitiated. Therefore, strategic managers must
become strategic thinkers with the ability to evaluate the changing environment,
analyze data, question assumptions, and develop new ideas. Additionally, strategic managers must be able to develop and document a plan of action through
strategic planning. Once a strategic plan is developed, managers maintain the
strategic momentum of the organization. As strategic managers attempt to carry
out the strategic plan, they evaluate its success, learn more about what works,
and incorporate new strategic thinking.
It is our view that strategic control is integral to managing strategic momentum and cannot be thought of or taught as a separate process. Therefore, traditional strategic control concepts are integrated into the strategy development
chapters under the heading of “Managing Strategic Momentum.” We believe that
vii
viii
PREFACE
this approach better reflects how strategic control works in organizations – as a
part of managing the strategy, not as an afterthought or add on.
Although we present a structured strategic management process, we believe
that strategic management is highly subjective, often requiring 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 that foundation for effective strategic
thinking, planning, and managing strategic momentum.
Features of the Text
Feedback from users of previous editions of Strategic Management of Health
Care Organizations has reinforced our belief that these features aid in providing
an informative, interesting, and pedagogically sound foundation for understanding and embracing strategic management of health care organizations.
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Each chapter begins with an Introductory Incident to provide a practical
example of the concepts discussed in the chapter.
Learning Objectives direct attention to the important points or skills introduced in the chapter.
Models, examples, and exhibits are included to assist in learning chapter
material.
The Map and Compass provides a useful metaphor for conveying the
view that strategic leaders must both plan as best they can but also learn,
adjust, and establish new direction (develop a new plan) as they progress.
Perspectives in each chapter are drawn from actual health care organizations’ experiences or emphasize recurring themes and abiding truths and
are useful to augment the content of each chapter. These sidebars are
designed to enable the student to relate to particular concepts presented
in the chapter.
Lessons for Health Care Managers serve as chapter summaries and highlight the most important lessons to be taken away from each chapter.
Health Care Manager’s Bookshelf introduces classic and popular books
that have particular relevance to the strategy topic discussed in the text.
Books were selected on the basis of their importance to present and
future health care managers and included because they either represent a
“classic contribution” to the field or provide potentially trend-setting information for strategic health care managers.
Key Terms and Concepts present the essential vocabulary and terminology
relative to the chapter’s material.
PREFACE
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Questions for Class Discussion aid the reader in reviewing the important
material and thinking about the implications of the ideas presented.
Notes contain the references used in development of the chapter
materials.
Three Appendices to assist readers – Analyzing Strategic Health Care
Cases, Health Care Organization Accounting, Finance, and Performance
Analysis, and Health Care Acronyms.
A Web-based Instructor’s 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, and answers to the end-of-chapter questions. The Instructor’s
Support also contains a true/false, multiple choice, and discussion question
test bank and can be found at www.wiley.com/go/ginter7e.
Through our own teaching, research, and consulting in the health care 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. We have students who
report back to us saying that they lead strategic planning in their organizations
using the process with great success. The process works.
Organization of the Text
The text contains 10 chapters and three appendices addressing the philosophy
and activities of strategic management. Chapter 1 introduces definitions for strategic management and its activities – strategic thinking, strategic planning, and
managing strategic momentum. The chapter discusses the need and rationale for
strategic management in today’s turbulent health care environment and 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
external environment – both the general environment and the health care industry
environment. Chapter 3 narrows the external environmental focus by providing strategic thinking maps for conducting service area and competitor analysis for a specific
health care organization. Assessment of the internal environment is accomplished
through strategic thinking maps for a health care value chain and analysis of the
organization’s resources, capabilities, and competencies, as examined in Chapter 4.
The directional strategies – mission, vision, values, and strategic goals – are
examined in Chapter 5. Developing a mission asks members of an organization
to strategically think about its distinctiveness; developing a vision allows them to
think about their hopes for the organization’s future; and building awareness
of organizational values makes members aware of the principles that should be
cherished and not compromised as the mission and vision are pursued. Strategic
goals establish clear targets and help focus activities. Chapters 2–5 collectively
constitute situation analysis.
ix
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PREFACE
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 demonstrates that strategic decisions are connected in an “ends–means” chain. Each decision along the decision chain more
explicitly defines the strategy and must be consistent with upstream and downstream decisions. Chapter 7 discusses how to evaluate the strategic alternatives
within each strategy type in the decision chain. These evaluation methods do
not make the strategy decision. Rather, they are constructs or maps for helping
strategists to think about the organization and its relative situation, thus enabling
them to understand the potential risks and rewards of their strategic choices.
Managing strategic momentum entails putting strategies to work (managerial actions that accomplish the strategy), incorporating strategy evaluation and
control, and building strategic awareness. Implementation requires that strategic
managers shape and coordinate the value chain components and ensure that
the organization’s action plans are directly tied to selected strategies. Chapter
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 it best contributes to accomplishment of the strategy. Chapter 9
examines the role of organizational culture, organizational structure, and
strategic resources in implementing strategy. These value chain components
determine the organizational context and are vital in effective strategy implementation. Chapter 10 demonstrates how strategy may be translated into organizational unit objectives and action plans. It is the organizational units that must
carry out strategy and strategic managers must review objectives and action
plans to ensure that they are coordinated and make best use of human, physical,
and financial resources. Each of these chapters points out the need to manage
strategic momentum by thinking, planning, and doing, and then rethinking, new
planning, and doing.
Finally there are three appendices as a reference for users of the text.
Appendix A, Analyzing Strategic Health Care Cases, presents a methodology
for case analysis for those using case studies to “practice” strategic thinking
and planning; Appendix B, Health Care Organization Accounting, Finance, and
Performance Analysis, as an accounting and finance refresher and reference;
and finally, Appendix C, Health Care Acronyms, is a quick source for definitions
of the “short-hand” language of health care.
The Author Team
In developing and writing this book, as with all our collaborative projects, we
have created a team in its truest sense. Recognizing that each of us makes a
unique contribution and provides leadership, we have changed the order in
which the authors are listed every two editions. For the first and second editions,
the authors were listed as Duncan, Ginter, and Swayne; for the third and fourth
editions, the authors were listed as Ginter, Swayne, and Duncan. In the fifth and
sixth editions, the order was Swayne, Duncan, and Ginter.
PREFACE
Acknowledgments
A number of people have provided inspiration, ideas, and considerable effort to
produce the seventh edition. We are indebted to many individuals for their assistance and encouragement. A special note of thanks to Sunil Erevelles, Chair of the
Department of Marketing at the Belk College of Business at the University of North
Carolina at Charlotte, and to Dean Max Michael, MD of the School of Public Health
at the University of Alabama at Birmingham, who have continuously been supportive of our efforts. Also, a special thanks to Andrew C. Rucks for his Appendix
B, Health Care Organization Accounting, Finance, and Performance Analysis and
his invaluable contribution to the text’s Web-based Instructor’s Support. Thank you
Rongbing (Bing) Xie, our teaching assistant at UAB, who tirelessly supported our
in-class and on-line teaching.
We must also thank our many students (many of whom became strategic management course instructors), who have provided feedback, made contributions,
used the book in their professional careers, and kept in contact to tell us of the
value of the book that remains on their bookshelves.
Finally, but most importantly, we thank our families who have supported and
encouraged us as we worked on still another writing project. Thank you all for
your understanding.
xi
1
The Nature of Strategic
Management
“It is not the strongest of the species that survive, nor the most intelligent, but the one most
responsive to change.”
— CHARLES DARWIN
Introductory Incident
It Can Be Done: Premier Healthcare Alliance Accountable Care
Collaboratives Are Saving Lives and Saving Costs
Statistics show that health care costs have been growing at an unsustainable rate, reaching an
estimated 17.3 percent of gross domestic product (GDP) in 2009, according to the Centers for
Medicare and Medicaid Services (CMS), representing the largest one-year increase in history
when the nation itself was in the midst of the “great recession.” Predictions are for health care
costs to be 19.3 percent of GDP in 2019 (four times the 5.1 percent of GDP in 1960). Despite the
high cost of health care, gaps and inequities persisted, leading to health care reform. The 2010
Patient Protection and Affordable Care Act (PPACA), or commonly Affordable Care Act (ACA) is
attempting to change the US health care system from a volume-based to a value-based model.
2
STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Premier Healthcare Alliance believes that accountable care organizations (ACOs) are the
way to better align the incentives and needs of all stakeholders. Premier ’s components to
the ACO model include:
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People-centered health homes that deliver primary care and coordinate with other
providers as needed.
New approaches to primary, specialty, and hospital care that reward care coordination,
efficiency, and productivity.
Tightly integrated relationships with specialists, ancillary providers, and hospitals to provide
focus and alignment on achieving high-value outcomes.
Provider/payer partnerships and reimbursement models that reward improved outcomes
(value over volume).
Population health information infrastructure, including health information exchanges to
enable care across a designated population.
The goal is to incentivize health and wellness, rather than paying for treating disease. ACOs
actually began in 2005, when CMS began the Physician Group Practice demonstration. Its success in developing incentives based on the quality of care provided and the estimated savings
generated for the Medicare population served, led to the formation of the Medicare Payment
Advisory Commission (MedPAC) to begin looking for real ways to reduce costs, while improving
quality of care and patient satisfaction. ACOs were incorporated into the Affordable Care Act
legislated in March 2010.
Premier Healthcare Alliance has developed a proven model for ACOs based on the following
key elements:
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Establish goals and mission – create a definition of areas to address and what the
collaborative will do to fulfill its mission.
Define consistent measures of success – common measures that will be used to improve
defined outcomes.
Data collection and normalization – use standardized data sets to meaningfully compare
results across participants.
Transparency – participants commit to open sharing of performance data across the
collaborative to identify the top performers and learn from them.
Driver analysis and collaborative execution – using transparent data, the collaborative can
set performance targets, identify opportunities for improvement, and establish areas of
focus.
Share best practices – share across the collaborative to realize improvement gains.
Performance improvement analysis – analyze data from the cohort and individuals to
highlight trends/opportunities that will drive performance and achieve goals.
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
Premier established QUEST®: High-Performing Hospitals collaborative (200 not-for-profit
hospitals in 31 states) for hospitals to learn from the top performers and develop and implement systemic improvements across their organizations. Three goals drove the process: save
lives, safely reduce the cost of care, and deliver the most reliable and effective care. In three
years, QUEST hospitals saved an estimated 22,164 lives and reduced health care spending by
$2.13 billion (national translation would be more than 86,000 lives and $25 billion saved).
Source: Premier Healthcare Alliance, Inc.
Learning Objectives
After completing the chapter you will be able to:
1. Explain why strategic management has become crucial in today’s dynamic
health care environment.
2. Trace the evolution of strategic management and discuss its conceptual
foundations.
3. Describe and explain the concept of strategic thinking maps.
4. Define and differentiate between strategic management, strategic thinking,
strategic planning, and managing strategic momentum.
5. Understand the necessity for both the analytic and emergent models of strategic
management.
6. Understand how an organization may realize a strategy that it never intended.
7. Understand the benefits of strategic management for health care organizations.
8. Understand the importance of systems approaches.
9. Explain the links between the different levels of strategy within an organization.
10. Describe the various leadership roles of strategic management.
Managing in a Dynamic Environment
The dramatic changes in the health care industry that began in the 1980s, marked
by the implementation of Medicare’s prospective payment system in 1983, continue today (see Perspective 1–1 for an overview of the Patient Protection and
Affordable Care Act – the most significant change for health care since the passage of Medicare and Medicaid in the 1960s, and still changing as components
are tested in courts and in its phased-in implementation). As a result, health
care institutions continue to face a turbulent, confusing, and often threatening
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STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
environment. Significant change comes from many sources, including: legislative
and policy initiatives; international as well as domestic economic and market
forces; demographic shifts and lifestyle changes; technological advances; and
fundamental health care delivery changes. Certainly, health care systems, as
well as other domestic and international health care organizations, have had to
continuously adapt to these and other changes. As suggested in the introductory
quote, health care organizations will have to be responsive to and effectively
manage change in this dynamic environment.
PERSPECTIVE 1–1
The Patient Protection and Affordable Care Act (PPACA)
The PPACA was enacted in March of 2010; most
of its provisions go into effect in 2014. This complex law has many provisions; some of the more
important ones are summarized here.
First, the law requires most US citizens and
legal residents under age 65 to have health
insurance; this is the “insurance mandate.” The
law provides financial penalties, if one does not
obtain coverage, and it provides subsidies, if one
has sufficiently low household income.
Second, the law requires large employers,
those with 50 or more employees, to provide
health insurance to their workers who work 30 or
more hours per week. Failure to do so results in
financial penalties on the employer. The most significant of these is a fine of $2,000 per uninsured
worker. Firms with less than 50 workers are not
required to offer coverage, but receive short-term
(two-year) subsidies if they choose to do so.
Third, the law requires the establishment of
“health insurance exchanges” in each state. The
states have discretion in how these organizations operate, but if a state fails to establish an
exchange, the federal government will operate
one in the state. Exchanges are virtual marketplaces where individuals and small employers
can compare coverage from different insurers,
obtain subsidies if they are eligible, and buy
insurance. The state exchange has to be selfsufficient, covering the administrative costs by
taxes or fees.
Fourth, within the exchanges individuals
and small firms may buy “platinum,” “gold,” “silver,” and “bronze” coverage. Each of these tiers
reflects coverage of the same “essential health
benefits” at a different expenditure level. A silver
plan, for example, must cover 70 percent of the
costs of the benefit package, with the subscriber
paying the other 30 percent out of pocket.
Each insurer may offer several combinations of
deductibles, copays, and coinsurance features to
meet the spending level in each tier. The states,
with strong guidance from the federal government, determine what constitutes “essential
health benefits.”
Fifth, the law required the states to expand
the Medicaid programs to include citizens and
legal residents between ages 19 and 64, inclusive, if their income was below 139 percent of
the federal poverty line. The Supreme Court
found the provision enforcing this expansion to
be unconstitutional. As a result, the states now
have the option to expand Medicaid. If they do
so, the federal government will initially pay 100
percent of the costs of the expansion, declining
to 90 percent by 2019.
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
This legislation poses a number of issues for
states, for employers, and for health care providers. The challenges include:
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Should a state undertake the Medicaid
expansion? The expansion provides coverage to many uninsured people in the state
and is largely paid for with federal dollars. However, state Medicaid budgets are
already strapped.
Should the state create an insurance
exchange tailored, to the extent
possible, to the preferences of the state, or
should it simply let the federal government
do it? Exchanges are to be “self-sustaining;”
how will the administrative functions be
funded?
Should a smaller employer who currently
offers coverage, drop the coverage, raise
wages, and encourage her employees to
buy coverage through the exchange?
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Large employers are required to offer
coverage or pay a fine. Should they
drop coverage, forget the headaches of
employer-sponsored coverage, and just pay
the fine?
How is a hospital affected by PPACA?
There will be fewer uninsured, but
patient copays and deductibles may
be larger and government payments
(i.e., Disproportionate Share payments)
to care for the poor and uninsured
will be reduced.
SUGGESTED READING
J. P. Newhouse, “Assessing Health Reform’s Impact
on Four Key Groups of Americans,” Health
Affairs 29, no. 9 (2010), pp. 1714–1724.
Sources: Michael A. Morrisey, PhD, Director, Lister Hill Center for
Health Policy and Department of Health Care Organization and
Policy, University of Alabama at Birmingham.
Coping with Change
How can health care leaders deal with change? Which issues are most important or most pressing? Furthermore, what new issues will emerge? It is likely
that there will be new issues for health care organizations that have yet to be
identified or fully assessed. Even more sobering, it seems certain that there will
be more change in the health care industry in the next 10 years than there has
been in the past 10 years.
Dealing with rapid, complex, and often discontinuous change requires leadership. Successful health care organizations have leaders who understand the
nature and implications of external change, the ability to develop effective
strategies that account for change, and the will as well as the ability to actively
manage the momentum of the organization. These activities are collectively
referred to as “strategic management.” The clearest manifestation of leadership in
organizations is the presence of strategic management and its activities. Strategic
management is fundamental in leading organizations in dynamic environments.
Strategic management provides direction and momentum for change.
Organizational change is a fundamental part of success. As health care leaders chart new courses into the future, in effect, they create new beginnings, new
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STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
chances for success, new challenges for employees, and new hopes for patients.
Therefore, it is imperative that health care managers understand the changes taking place in their environment; they should not simply be responsive to them,
they must create the future. Health care leaders must see into the future, create
new visions for success, and be prepared to make significant improvements.
The Foundations of Strategic Management
In political and military contexts, the concept of strategy has a long history.
For instance, the underlying principles of strategy were discussed by Sun Tzu,
Homer, Euripides, and many other early strategists and writers. The English word
– , meaning “a general,” which in turn
strategy comes from the Greek strat–eg–os
comes from roots meaning “army” and “lead.”1 The Greek verb strat–eg–eo– means
“to plan the destruction of one’s enemies through effective use of resources.”2
Similarly, many of the terms commonly used in relation to strategy – objectives,
strategy, mission, strengths, weaknesses – were developed by the military.
Long-Range Planning to Strategic Planning
The development of strategic management began with much of the business
sector adopting long-range planning. Long-range planning was developed in the
1950s in many organizations because operating budgets were 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 organization’s
products and services and to determine where demand will occur. Many organizations have used long-range planning to determine facilities expansion, hiring
forecasts, capital needs, and so on.
As industries became more volatile, long-range planning was replaced by strategic planning because the assumption underlying long-range planning is that
the organization will continue to produce its present products and services –
thus, matching production capacity to demand is the critical issue. However, the
assumption underlying strategic planning is that there is so much economic,
social, political, technological, and competitive change taking place that the
leadership of the organization must periodically evaluate whether it should even
be offering its present products and services, whether it should start offering
different products and services, or whether it should be operating and marketing
in a fundamentally different way.
Although strategies typically take considerable time to implement, and thus
are generally long range in nature, the time span is not the principal focus of
strategic planning. In fact, strategic planning, supported by the management
of the strategy, compresses time. Competitive shifts that might take generations
to evolve instead occur in a few short years.3 In a survey of senior executives, 80
percent indicated that the productive lives of their strategies were getting shorter
and 75 percent believed that their leading competitor would be different within
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
five years.4 Therefore, it is preferable to use “long range” and “short range” to
describe the time it will take to accomplish a strategy rather than to indicate a
type of planning.
Strategic Planning to Strategic Management
The 1960s and 1970s were decades of major growth for strategic planning in
business organizations. Leading companies such as General Electric were not
only engaged in strategic planning but also actively promoted its merits in
the business press. The process provided these 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.5 In the 1980s the concept of strategic planning was broadened to strategic management. This evolution acknowledged not only the importance of the
dynamics of the environment and that organizations may have to totally reinvent
themselves, but also that continuously managing and evaluating the strategy are
keys to success. Thus, strategic management was established as an approach or
philosophy for managing complex enterprises and, as discussed in Perspective
1–2, should not be viewed as a passing fad.
Strategic Management in the Health Care Industry
Strategic management concepts have been employed within health care organizations only in the past 30 to 35 years. Prior to this time, individual health care
organizations had few incentives to employ strategic management because typically they were independent, freestanding, not-for-profit institutions, and health
services reimbursement was on a cost-plus basis. In many respects health care
has become a complex business using many of the same processes and much
of the same language as the most sophisticated business corporations. Certainly,
in the late 1980s and 1990s many health care organizations had much to learn
from strategically managed businesses. As a result, many of the management
methods adopted by health care organizations, both public and private, initially
were developed in the business sector.
PERSPECTIVE 1–2
Are the Following Management Approaches Fads?
Management fads? Management techniques?
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
7
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STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
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1950s
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1960s
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1970s
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1980s
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1990s
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2000s
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2010s
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Theories X and Y
Management by Objectives
Quantitative Management
Diversification
Managerial Grid
T-Groups
Matrix Management
Conglomeration
Centralization/
Decentralization
Zero-Based Budgets
Participative Management
Portfolio Management
Quantitative MBAs
Theory Z
One-Minute Managing
Organization Culture
Intrapreneuring
Downsizing
MBWA (Management by
Wandering Around)
TQM/CQI
Customer Focus
Quality Improvement
Reengineering
Benchmarking
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
for all of these management approaches were to
manage and shape the organization – to make it
better, to make it an excellent organization. One
of the things that has distinguished all of these
“fads” is the enthusiasm and commitment they
have engendered among managers and workers. For many, these approaches have significantly increased the meaning of work – no small
accomplishment in an era in which people are
increasingly hungry for meaning. And certainly
organizations need to create meaning.1
When management approaches such as
these fail, it is usually because they become an
end in themselves. Managers lose sight of the
real purpose of the approach and the process
becomes more important than the product.
Managers start working for the approach rather
than letting the approach work for them.
What will be the “management fads” of the next
decade?2 Will you be a part of these or past attempts
to make the organization better or will you simply dismiss them as fads? Perhaps benchmarking,
quality improvement, the learning organization, or
LEAN Six Sigma will turn your organization around.
One of these approaches may help to make your
organization truly excellent or save it from decline.
Is strategic management just another fad? Will
it stand the test of time? If strategic management
becomes an end in itself, if its activities do not
foster and facilitate thinking, it will not be useful.
However, if strategic management helps managers to think about the future and guide their
organizations through turbulent environments,
strategic management will have succeeded.
REFERENCES
1. J. Daniel Beckham, “The Longest Wave,”
Healthcare Forum Journal 36, no. 6 (November/
December 1993), pp. 78, 80–82.
2. “Rethinking the Cause of Management Fads,”
Strategic Direction 21, no. 4 (2005), p. 28.
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
Although the values and practices of for-profit business enterprises in the private sector have been advocated as the appropriate model of managing health
care organizations, a legitimate question arises concerning the appropriateness
of the assumption that business practices may always be relevant to the health
care industry. Certainly, not all the “big ideas” have delivered what was promised,
even in business.6 It has been pointed out that:
1. Some strategic alternatives available to non-health care organizations may
not be realistic for many health care organizations.
2. Health care organizations have unique cultures that influence the style of
and participation in strategic planning.
3. Health care has always been subject to considerable outside control.
4. Society and its values place special demands on health care organizations.7
However, strategic management, especially when customized to health care,
does seem to provide the necessary processes for health care organizations to
cope with the vast changes that have been occurring. Over time these business
approaches increasingly have been modified to fit the unique aspects of health
care organizations.
Strategic Management Versus Health
Policy Planning
There has been and continues to be substantial health planning (policy) in the
United States. Efforts at health planning are initiated by either state or local governments and the resulting health policies are implemented through legislation
or private or non-governmental agencies. Many of these planning efforts are
disease 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).8 As a result, a variety of state and federal health
planning or policy initiatives have been designed to: (1) enhance quality of
care and reduce medical errors; (2) provide or control access to care; and (3)
contain costs.
These health-planning efforts are not strategic management. Health planning
is the implementation of local, state, and federal health policy and affects a
variety of health care organizations. As explained in Perspective 1–3, the intent
of health policy is to provide the context for the development of the health care
infrastructure as a whole. In contrast, strategic management is organization specific. 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.
9
10
STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
PERSPECTIVE 1–3
What is Health Policy?
Health policy determines the rules of the game
that apply to all consumers and providers in the
field. It is the development and maintenance
of an infrastructure to efficiently enhance the
health of the public.
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. Meeting 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.
The Congress and the state legislatures set
health policy. In addition, the administrative
authority given to executive branches and
their agencies sets policy. Therefore, the Center
for Medicare and Medicaid Services determines much of the health policy for federal
Medicare and Medicaid. The Centers for Disease
Control and Prevention, the Food and Drug
Administration, and the Occupational Health and
Safety Administration set and enforce health and
safety standards. State departments of health,
insurance, and environmental quality set health
policy within their own spheres of influence.
There are many analytic tools that come into
play in helping to determine the rules that are
adopted. These include economics, law, political
science, epidemiology, medicine, and health services research. Health policy questions are sometimes very broad and at other times very specific.
Some important questions include:
●
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●
Is health care a right or an individual
responsibility?
Can the human costs of poor health be
quantified?
Can higher taxes on saturated fats reduce
the prevalence of obesity?
Would a refundable tax credit encourage
the uninsured to buy coverage?
Would higher incomes or more health
services do more to improve health status?
Who pays if employers are required to
provide health insurance?
Source: Michael A. Morrisey, PhD, Director, Lister Hill Center for
Health Policy and Department of Health Care Organization and
Policy, University of Alabama at Birmingham.
The Dimensions of Strategic Management
There are many ways to think about strategic management in organizations. In
fact, Henry Mintzberg identified ten distinct schools of thought concerning organizational strategy.9 Three of these approaches were prescriptive and analytical:
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
the design school, the planning school, and the positioning school. Six schools
of thought were descriptive and emergent: the entrepreneurial school, the cognitive school, the learning school, the political school, the cultural school, and the
environmental school. The final school of thought, the configurational school,
specifies the stages and sequence of the process and attempts to place the findings of the other schools in context.10
Analytical Versus Emergent Approaches
Given the careful reasoning of the proponents of these various approaches
to strategic management, it is safe to assume that there is no one best way to
think or learn about strategy making in complex organizations. Analytical or
rational approaches to strategic management rely on the development of a logical sequence of steps or processes (linear thinking). Emergent models, on the
other hand, rely on intuitive thinking, leadership, and learning and are viewed
as being a part of managing. Both approaches are valid and useful in explaining an organization’s strategy. However, neither the analytical approach nor the
emergent view, by itself, is enough. David K. Hurst explains:
“The key question is not which of these approaches of action is right, or
even which is better, but when and under what circumstances they are useful to understand what managers should do. Modern organizational life is
characterized by oscillations between periods of calm, when prospective
rationality seems to work, and periods of turmoil, when nothing seems to
work. At some times, analysis is possible; at other times, only on-theground experiences will do.”11
As a result, both approaches are required. It is difficult to initiate and sustain
organizational action without some predetermined logical plan. Yet in a dynamic
environment, such as health care, managers must expect to learn and establish
new directions as they progress. The analytical approach is similar to a map,
whereas the emergent model is similar to a compass. Both may be used to guide
one to a destination. Maps are better in known worlds – worlds that have been
charted before. Compasses are helpful when leaders are not sure where they are
and have only a general sense of direction.12
Managers may use the analytical approach to develop a strategy (map) as
best they can from their understanding of the external environment and by
interpreting the capabilities of the organization. Once they begin pursuing the
strategy, new understandings and strategies may emerge and old maps (plans)
must be 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.”13 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.14
11
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STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
What is needed is some type of model that provides guidance or direction to
strategic managers, yet incorporates learning and change. If strategy making can
be approached in a disciplined way, then there will be an increased likelihood
of its successful implementation. A model or map of how strategy may be developed will help organizations to view their strategies in a cohesive, integrated,
and systematic way.15 Without a model or map, managers run the risk of becoming totally incoherent, confused in perception, and muddled in practice.16
Combining the Analytical and Emergent Views
In this text, a series of “strategic thinking maps” are presented. These maps are
designed to ignite strategic thinking as well as strategic planning and foster new
thinking and planning when required. The strategic thinking maps will start the
journey to develop a comprehensive strategy for the organization, yet the maps
cannot anticipate every contingency. Managers will learn a great deal about their
strategic plans as they manage them. Therefore, strategic managers will have to
think, analyze, use intuition, and reinvent the strategy as they go. As the physicist David Bohm observed, the purpose of science is not the “accumulation of
knowledge” but rather the creation of “mental maps” that guide and shape our
perception and action.17
A model or map that accounts for both the analytical and the emergent views
of strategic management is presented in Exhibit 1–1. This strategic thinking map
serves as a general model for health care strategic managers, illustrates the interrelationships and organizes the major components, and provides the framework
for much of the discussion in this book. As illustrated in Exhibit 1–1, strategic
management has three elements – strategic thinking, strategic planning, and
managing strategic momentum. These activities are interdependent; activities in
each element affect, and are affected by, the others.
EXHIBIT 1–1
Strategic Thinking Map of Strategic Management
Ex
En terna
vir
on l
me
Strategic Planning
nt
l
na me
ter
Ex viron
En
Situational Analysis
• External Analysis
• Internal Analysis
• Directional Strategies
Strategic Thinking
•
•
•
•
External Orientation
Analyze Data
Question Assumptions
Generate New Ideas
•
•
•
•
Strategy Formulation
Directional Strategies
Adaptive Strategies
Market Entry Strategies
Competitive Strategies
Planning the Implementation
• Service Delivery Strategies
• Support Strategies
• Action Plans
External Environment
nt
Managing
Strategic
Momentum
•
•
•
•
Managerial Action
Strategy Evaluation
Emergent Learning
Re-initiate Strategic
Thinking
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
Strategic managers must become strategic thinkers with the ability to evaluate the changing environment, analyze data, question assumptions, and develop
new ideas. Additionally, they must be able to develop and document a plan of
action through strategic planning. Strategic planning is a decision-making and
documentation process that creates the strategic plan. Once a strategic plan is
developed, strategic managers must manage the strategic momentum of the
organization. As strategic managers attempt to carry out the strategic plan they
evaluate its success, learn more about what works, and incorporate new strategic thinking. As indicated by the double-headed arrows in Exhibit 1–1, any
one element of the model may initiate a rethinking of another element. For
example, planning the implementation may provide new information that necessitates taking another look at strategy formulation. Similarly, managing strategic
momentum may provide new insights for implementation planning, strategy
formulation, or the situational analysis.
The distinction among the terms strategic thinking, strategic planning, and
managing strategic momentum is important and all three activities must occur
in truly strategically managed organizations. Therefore, each stage of the model
is explored in more depth.
Strategic Thinking
The first stage depicted in Exhibit 1–1 is strategic thinking and is the fundamental intellectual activity underlying strategic management. It has been observed
that leaders, similar to great athletes, must simultaneously play the game and
observe it as a whole.18 Mired in a complex situation, the leader must rise above
it to understand it. Preserving distance may be the only way to see the full picture.19 This skill is similar to leaving the playing 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.
But to truly understand the big picture, one must not only go to the press box
to observe the “game,” but must also have a “quiet room” to periodically think
about it, to understand it, and perhaps to change the strategy or players.
Strategic thinking is an individual intellectual process, a mindset, or method
of intellectual analysis that asks people to position themselves as leaders and
see the “big picture.” Vision and a sense of the future are inherent parts of strategic thinking. Strategic thinkers are constantly reinventing the future – creating
windows on the world of tomorrow. James Kouzes and Barry Posner in The
Leadership Challenge have indicated: “All enterprises or projects, big or small,
begin in the mind’s eye; they begin with imagination and with the belief that
what is merely an image can one day be made real.”20 Strategic thinkers draw
upon the past, understand the present, and envision an even better future.
Strategic thinking requires a mindset – a way of thinking or intellectual process
that accepts change, analyzes the causes and outcomes of change, and attempts
to direct an organization’s future to capitalize on the changes. More specifically,
strategic thinking:
●
●
acknowledges the reality of change,
questions current assumptions and activities,
13
14
STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
●
●
●
●
builds on an understanding of systems,
envisions possible futures,
generates new ideas, and
considers the organizational fit with the external environment.
Strategic thinking generates ideas about the future of an organization and
ways to make it more relevant – more in tune with the world. Strategic thinking
assesses the changing needs of the organization’s stakeholders and the changing technological, social and demographic, economic, legislative/political, and
competitive demands of its world.
Strategic thinkers are always questioning: “What are we doing now that we
should stop doing?” “What are we not doing now, but should start doing?” and
“What are we doing now that we should continue to do but perhaps in a fundamentally different way?” For the strategic thinker, these questions are applicable
to everything the organization does – its products and services, internal processes,
policies and procedures, strategies, and so on. Successful strategies often require
being what you haven’t been, thinking as you haven’t thought, and acting as you
haven’t acted.21 Strategic thinkers examine assumptions, understand systems and
their interrelationships, and develop alternative scenarios of the future. Strategic
thinkers forecast external technological, social and demographic changes, as well
as critical changes in the legislative and political arenas. Strategic thinking is very
much a leadership activity and quite different from what subject matter experts
do. For example, strategic thinkers specialize in relationships and context whereas
expert thinkers specialize in well-defined disciplines and functions. Strategic thinkers act on intuition and “gut feel” when data is incomplete – focus on action and
moving forward where as experts pay rigorous attention to knowledge, evidence,
and data – focus on understanding.
Everyone a Strategic Thinker Strategic thinking provides the foundation for
strategic management. However, strategic thinking is not just the task of the CEO,
health 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.22 Everyone, even the lowest paid employees, should be encouraged to think strategically and consider how to reinvent what he or she does. For
example, understanding that a nursing home’s image is based on the customers’
perception of cleanliness can motivate custodians to think strategically and reinvent the way the nursing home is cleaned. Strategic thinking is supported by the
continuous management of the strategy and documented through the periodic
process of strategic planning.
Strategic Planning
Strategic planning is the next activity in the general model of strategic management illustrated in Exhibit 1–1. Strategic planning is the periodic process of
developing a set of steps for an organization to accomplish its mission and vision
using strategic thinking. Therefore, periodically, strategic thinkers come together
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
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 what is required to fit the organization with the
external environment, and
results in a documented strategic plan.
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.
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 fundamental 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 – where to attend college, whether or not to get married, where to
live, and so on – are largely informed judgments. Similarly, the most important
organizational decisions, such as entering a market, introducing a new service,
or acquiring a competitor, although based on information and analysis, are
essentially judgments.
Decision consistency is central to strategy; when an organization exhibits a
consistent behavior it has a strategy. Strategy is the set of guidelines or plan an
organization chooses to ensure decision consistency and move it from where it
is today to a desired state some time in the future – it is the road map to that
future. Developing the road map (strategic plan) requires situational analysis,
strategy formulation, and planning the implementation of the strategy.
Analyzing and understanding the situation is accomplished by three separate
strategic thinking activities: (1) external environmental analysis; (2) internal
environmental analysis; and (3) the development or refinement of the organization’s directional strategies. The interaction and results of these activities
form the basis for the development of strategy. These three interrelated activities drive the strategy. Forces in the external environment suggest “what the
organization should do.” That is, success is a matter of being effective in the
environment – doing the “right” thing. Strategy is additionally influenced by
the internal resources, competencies, and capabilities of the organization and
represents “what the organization can do.” Finally, strategy is driven by a
15
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STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
common mission, common vision, and common set of organizational values and
goals – the directional strategies.
The directional strategies are the result of considerable thought and analysis
by top management and indicate “what the organization wants to do.” Together,
these forces are the essential input to strategy formulation. They are not completely distinct and separate; they overlap, interact with, and influence one
another. Chapter 2 provides strategic thinking maps for examining the general
and health care external environment and Chapter 3 addresses service area
competitor analysis. Chapter 4 discusses the internal environment and provides
strategic thinking maps for evaluating the organization’s strengths and weaknesses and the creation of competitive advantage. The development of the
directional strategies through strategic thinking maps is explored in more detail
in Chapter 5.
Whereas situational analysis involves a great deal of strategic thinking –
gathering, classifying, and understanding information – strategy formulation
involves decision making that uses the information to create a plan. Hence,
strategy formulation involves directional, adaptive, market entry, and competitive
strategy decisions and, typically, these decisions are made in strategic planning
sessions. Strategic maps for strategy formulation are presented in Chapters 6 and 7.
Once the strategy for the organization has been formulated (including directional, adaptive, market entry, and competitive), implementation plans that
accomplish the organizational strategy are developed. These implementation
plans are made up of strategies developed in the key areas that create value
for an organization – service delivery and support activities – and are typically
discussed as part of strategic planning. Strategies must be developed that best
deliver the products or services to the customers through pre-service, pointof-service, and after-service activities. In addition to service delivery strategies,
strategies must be developed for value-adding support areas such as the organization’s culture, structure, and strategic resources. Strategy implementation is
discussed further in Chapters 8 through 10.
A Group Process of Key Players The CEO can develop a strategy. A separate
planning department can develop a strategy. However, such approaches run into
trouble during implementation, as there is no common “ownership” of the plan
or the tasks associated with it. Therefore, strategic planning for organizations
is typically a group process. It involves a number of key participants working
together to develop a strategy. Although strategic planning provides the structure for thinking about strategic issues, effective strategic planning also requires
an exchange of ideas, sharing perspectives, developing new insights, critical
analysis, as well as give-and-take discussion. Strategic planning efforts will be
diminished without future-oriented highly provocative thinking and dialog.23
For most organizations, it is not possible for everyone to be a full participant
in the strategic planning process. Decision making is protracted if everyone must
have a say – and a consensus may never be reached. A few key players – senior
staff, top management, or a leadership team – are needed to provide balanced
and informed points of view. Often, representatives of important functional areas
are included as well. An effective leader will incorporate a variety of individuals
with different backgrounds and perspectives to provide input to the process. Some
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
participants may be mavericks and nudge the group in new ways. If everyone is
pre-programmed to agree with the leader, participation is not required – but neither will an actionable plan be realized.
The key to successful strategic planning is to have a recurring group process.
Having a periodic structured process initiates a reconsideration, discussion, and
documentation of all the assumptions. Without a planned process, managers
never quite get to it. Without a process, ideas are not discussed, conclusions are
not reached, decisions are not made, strategies are not adopted, and strategic
thinking is not documented. The nature of the group and the process are often
the keys to success.
Managing Strategic Momentum
Sometimes a strategic plan is created but nothing really changes, strategic
momentum is lost, and plans are never implemented. As the next year rolls
around, it is once again time for the annual strategic planning retreat and the
cycle repeats itself. This example is one of strategic planning without managing
strategic momentum. Alan Weiss, in his irreverent book, Our Emperors Have No
Clothes, explains that in these situations the problem is that, “Strategy is usually
viewed as an annual exercise at best, an event that creates a ‘product,’ and not a
process to be used to actually run the business.”24
The third element of strategic management shown in Exhibit 1–1, managing
strategic momentum, concerns the day-to-day activities of managing the strategy
to achieve the strategic goals of the organization. Once plans are developed,
they must be actively managed and implemented to maintain the momentum of
the strategy. Strategic thinking and periodic planning should never stop; they
become ingrained in the culture and philosophy of a strategically managed
organization. Managing strategic momentum:
●
●
●
●
●
●
is the actual work to accomplish specific objectives,
concerns decision-making processes and their consequences,
provides the style and culture,
evaluates strategy performance,
is a learning process, and
relies on and initiates new strategic thinking and new periodic strategic
planning.
For many organizations, strategic planning is the easiest part of strategic
management and the planning process receives the greatest attention. However,
plans must be implemented to create momentum and to realize strategic intent.
Poor implementation or lack of implementation has rendered many strategic
plans worthless. Whereas the strategic plan and its underlying strategic thinking
must be viewed as important, they fall apart without implementation and the
decision-making guidelines provided for managers at all levels in the organization. If the strategy is not actively managed, it will not happen.
At the same time, managers often need to react to unanticipated developments and new competitive pressures. Such environmental shifts may be subtle,
17
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STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
other times they can be discontinuous and extremely disruptive. When external
changes occur, new opportunities emerge and new competencies are born,
while others die or are rendered inconsequential. Inevitably, the basic rules of
competing and survival will change.25 Managing strategic momentum is how an
organization constructively manages change, evaluates strategy, and reinvents
or renews the organization. As Henry Mintzberg has indicated, “. . . a key to
managing strategy is the ability to detect emerging patterns and help them take
shape.”26
Different environmental characteristics and different organizational forms
require new and different ways of defining strategy.27 Strategy may be an intuitive, entrepreneurial, political, culture-based, or learning process. In these cases,
maps are of limited value. Managers must create and discover an unfolding
future, using their ability to learn together in groups and interact politically in a
spontaneous, self-organizing manner. However, learning is 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.28 It requires managing strategic momentum.
Clearly, rational strategies do not always work out as planned (an unrealized strategy). In other cases, an organization may end up with a strategy that
was quite unexpected as a result of having been “swept away by events” (an
emergent strategy). Leadership, vision, and “feeling our way along” (learning)
often provide a general direction without a real sense of specific objectives or
long-term outcomes. It is quite possible that a strategy may be developed and
subsequently realized. However, we must be realistic enough to understand that
when we engage in strategic management the theoretical ideal (strategy developed, then realized) may not, and in all probability will not, be the case. A great
deal may change. The possibilities include:
1. There is a reformulation of the strategy during implementation as the
organization gains new information and feeds that information back to
the formulation process, thus modifying intentions en route.
2. The external environment is in a period of flux and strategists are unable
to accurately predict conditions; the organization may therefore find itself
unable to respond appropriately to a powerful external momentum.29
3. Organizations in the external environment implementing their own strategies may block a strategic initiative, forcing the activation of a contingency
strategy or a period of “groping.”
Obviously, health care organizations formulate strategies and realize them to
varying degrees. For instance, as a part of a deliberate strategy to broaden their
market, improve service to the community, and retain referral patients, many
community hospitals began offering cardiac services such as catheterization
and open heart surgery. As a result, some of these hospitals have built market
share and increased 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
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
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 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 Max DePree has
suggested, “Leaders are obligated to provide and maintain momentum.”30 The
only legitimate work in an organization is work that contributes to the accomplishment of the strategic plan. Although organizations may accomplish superior
results for a brief period of time, it takes the orchestration of management as
well as leadership to perpetuate these capabilities far into the future.31
The Benefits of Strategic Management
The three stages of strategic management – strategic thinking, strategic planning,
and managing 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 values;
improves financial performance in many cases;32
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; and
encourages innovation and change within the organization to meet the
needs of dynamic situations.
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STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
Strategic management is a unique perspective that requires everyone in the
organization to cease thinking solely in terms of internal functions and operational responsibilities. It insists that everyone adopts what may be a fundamentally new attitude – an external orientation and a concern for the big picture. It is
basically optimistic in that it integrates “what is” with “what can be.” Perspective
1–4 illustrates an application of Jim Collins’ book, Good to Great, to health care
organizations.
PERSPECTIVE 1–4
Good to Great in Health Care
Several years ago Jim Collins’ book, Good to Great:
Why Some Companies Make the Leap . . . and
Others Don’t, made an impact on the business
scene. Collins studied 1,435 good companies and
then analyzed why 11 of the companies became
great (see Health Care Manager’s Bookshelf in
Chapter 8). Chip Caldwell & Associates began
a “good to great” project in health care and
studied 44 health care organizations ranging in
size from 15 to 854 beds. An additional project
conducted by the group assessed 226 healthrelated organizations in Los Angeles County,
California. For each organization they measured changes in cost per case mix adjusted discharge. Those organizations that finished in the
75th percentile or higher were labeled quantum
improvers and those in the bottom quartile were
labeled non-starters.
About 20 percent of the quantum improvers were already in a favorable cost position
and about 20 percent of the non-starters were
already in an unfavorable cost position. The
researchers observed that this meant the quantum improvers were becoming better faster and
the non-starters were becoming worse faster. In
other words, the performance gap was growing
and health care firms not applying quantum
improver strategies risked being left behind
by organizations that were raising the bar and
redefining the playing field. Some important
principles of the quantum improvers:
1. Set non-negotiable goals. Quantum
improvers perform a gap analysis and
determine areas where improvement is
possible and necessary. They determine
where the biggest differences are from
established benchmarks and focus on the
vital few areas that will make the biggest
positive difference to the organization.
Non-starters receive gap information,
debate it for six months, seek more data,
and agree to talk some more. Quantum
improvers interpret the results as an
immediate call for action. Strategic leaders step up at defining moments, keep
the organization on path, and demonstrate that failure to act is not an option.
2. Focus on key businesses. Health care
organizations cannot be all things to all
people. Organizations have to develop a
“stop doing” list to include those services
that are least profitable and must be eliminated. Doing away with any service is very
hard in health care because no one wants
to eliminate a service that is helping people
even if it is very expensive. Focusing on
those services that support the core mission
and separating financial issues from emotional issues may make the decision to eliminate a service easier and more objective.
3. Use a tight–loose–tight approach.
Begin with a tight understanding of the
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
preferred direction for the organization,
then delegate the understanding to a
group of leaders who have flexibility in
determining how they will achieve the
direction, and finally, monitor with tight
accountability to make sure that the
selected approach is working.
Quantum improvers have a culture of
accountability but not a punitive culture. They
are not threat driven. Rather than punish those
who do not achieve, assistance is provided by
upper leadership until the desired results are
accomplished. As Collins notes, great organizations do not have miracle moments of
change; instead they emphasize committed,
controlled, and practical leadership.
Source: Shannon K. Pieper, “Good to Great in Healthcare: How
Some Organizations Are Elevating Their Performance,” Healthcare
Executive 19, no. 3 (2004), pp. 20–26.
Health care leaders require a comprehensive strategic management approach
to guiding their organizations through societal and health care industry changes
that will occur in the future. Strategic management concepts, activities, and
methods presented in this text will prove to be valuable in coping with these
changes. In addition, the internal, non-quantifiable benefits of strategic management will aid health care organizations in better integrating functional areas to
strategically utilize limited resources and to satisfy the various publics served.
Strategic management is the exciting future of effective health care leadership.
What Strategic Management is Not
Strategic management should not be regarded as a technique that will provide
a “quick 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 thinking, strategic management must be adopted as a
philosophy of leading and managing the organization.
Strategic management is not a process of completing paperwork. If strategic
management has reached a point where it has become simply a process of filling in endless forms, meeting deadlines, drawing milestone charts, or changing
the dates of last year’s goals and plans, it is not strategic management. Effective
strategic management requires little paperwork. It is an attitude, not a series of
documents. Similarly, strategic management should not be initiated merely to
satisfy a regulatory body’s or an accrediting agency’s requirement for a “plan.”
In these situations, no commitment is made on the part of key leadership, no
participation is expected from those in the organization, and the plan may or
may not be implemented.33
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Strategic management is not a process of simply extending the organization’s
current activities into the future. It is not based solely on a forecast of present
trends. Strategic management attempts to identify the issues that will be important in the future. Health care strategic managers should not simply ask the
question, “How will we provide this service in the future?” Rather, they should be
asking questions such as, “Should we provide this service in the future?” “What
new services will be needed?” “What services are we providing now that are no
longer needed?”
A Systems Perspective
The problems facing organizations are so complex that they defy simple solutions. Understanding the nature of the health care environment, the relationship
of the organization to that environment, and the often-conflicting interests of
internal functional departments requires a broad conceptual paradigm. Yet, it is
difficult to comprehend so many complex and important relationships. Strategic
managers have found general systems theory or a systems approach to be a useful perspective for organizing strategic thinking.
A system may be defined as “a perceived whole whose elements ‘hang together’
because they continually affect each other over time and operate toward a common purpose.”34 More simply, a system is a set of interrelated elements. Each
element connects to every other element, directly or indirectly, and no subset of
elements is unrelated to any other subset. Further, a system must have a unity
of purpose in the accomplishment of its goals, functions, or desired outputs.35
Understanding the complex whole through a systems approach:
●
●
●
●
●
●
●
aids in identifying and understanding the “big picture”;
facilitates the 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; and
provides a basis for redesign.
The use of the systems approach requires strategic managers to define the
organization in broad terms and to identify the important variables and interrelationships that will affect decisions. By defining systems, strategic managers are
able to see the “big picture” in proper perspective and avoid devoting excessive
attention to relatively minor aspects of the total system.36 A systems approach
permits strategic managers to concentrate on those aspects of the problem that
most deserve attention and allows a more focused attempt at resolution. As Peter
Senge has indicated, systems approaches help us to see the total system and
how to change the pieces within the system more effectively and intelligently.37
Perspective 1–5 provides additional insight into the use of systems approaches
to see the big picture.
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
PERSPECTIVE 1–5
To Manage is to Control – To Control is to Manage
To control means to regulate, guide, or direct. To
manage means to control, handle, or direct.
Therefore, management is control and control is
management. The very act of managing suggests
controlling the behavior or outcome of some
process, program, or plan. Vision, mission, values,
and strategies are types of controls. Similarly,
policies, procedures, rules, and performance
evaluations are clearly organizational controls.
All of these are attempts to focus organizational
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 great,
we create hopeless bureaucracy. If control is
too weak, we have 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 dictatorial or manipulative.
Given how easy it is to overdo management
(control), a general rule of thumb is that “less is
best.” Setting direction and empowering people
to make their own decisions on how best to
achieve the vision seems to work. Effective management (control) is essential if organizations
are to renew themselves; however, overmanaging (overcontrolling) can destroy initiative and
be viewed as meddling, often reducing motivation as well.
Recognizing the importance of a systems framework, health care managers
commonly refer to “the health care system” or “the health care delivery system”
and strive to develop logical internal organizational systems to deal with the
environment. In a similar manner, health care strategic managers must use systems to aid in strategic thinking about the external environment. The community
and region may be thought of as an integrated system with each part of the
system (subsystem) providing a unique interdependent contribution.
The Level and Orientation of the Strategy
A systems perspective will be required to specify the level of the strategy and
the relationship of the strategy to the other strategic management activities.
Therefore, the organizational level and orientation should be carefully considered and specified before strategic planning begins. For example, strategies may
be developed for large, complex organizations or small, well-focused units. The
range of the strategic decisions that are considered in these two organizations is
quite different, but both can benefit from strategic management.
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STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
A clear specification of the “level” of thinking will determine the type and
range of decision to be made in strategic planning. For example, a large integrated health care system may develop strategy for a number of levels – a
corporate level, a divisional level, an organizational level, and a unit level. As
illustrated in Exhibit 1–2, when considered together these strategic perspectives
create a hierarchy of strategies that must be consistent and support one another.
Each strategy provides the “means” for accomplishing the “ends” of the next
higher level. Thus, the unit level provides the means for accomplishing the ends
of the organizational level. The organizational level, in turn, provides the means
for accomplishing the ends of the divisional level. Finally, the divisional level is
the means to the ends established at the corporate level. As illustrated in Exhibit
1–2, part of the context for lower-order strategy is provided by the strategic planning of higher-order strategies.
EXHIBIT 1–2 The Link between Levels of Strategic Management
Strategic
Thinking
Managing
Strategic
Momentum
Corporate Level
Strategic
Planning
Strategic
Thinking
Managing
Strategic
Momentum
Divisional Level
Strategic
Planning
Strategic
Thinking
Managing
Strategic
Momentum
Organizational
Level
Strategic
Planning
Strategic
Thinking
Unit Level
Managing
Strategic
Momentum
Strategic
Planning
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
Trinity Health is the tenth largest health system and fourth largest Catholic
health system in the United States and is an example of a health care organization that should develop strategy for all four organizational levels. As of the
beginning of 2013, Trinity had over $11.3 billion in assets, $9 billion in revenues,
and was comprised of 49 acute-care hospitals, 432 outpatient facilities, 33 longterm care facilities, and numerous home health offices and hospice programs
located in ten US states. Clearly, strategies should be developed for the corporate
level – Trinity Health, for each major division such as Saint Joseph Mercy Health
System, for each distinct organization within the division such as Saint Joseph
Mercy Saline Hospital, and within the various units (clinical operations).
Corporate-Level Strategy Corporate-level strategies address the question, “What business(es) should we be in?” Such strategies consider multiple,
sometimes unrelated, markets and typically are based on return on investment,
market share or potential market share, and system integration. For Trinity
Health, clearly the corporate perspective is an important one. The question of
“What businesses should we be in?” has resulted in several semi-autonomous
“businesses” operating in a number of different markets, including hospitals,
outpatient facilities, long-term care, home health, and hospices. Key strategic
questions might include, “What other types of businesses should Trinity consider?” For example, would wellness or mental health centers be an appropriate
strategic move?
Divisional-Level Strategy Divisional-level strategies are more focused and
provide direction for a single business type. Divisional strategies are most often
concerned with positioning the division to compete. These semi-autonomous
organizations are often referred to as SBUs (strategic business units) or SSUs
(strategic service units). Therefore, strategic managers for these units are most
concerned with a specified set of competitors and well-defined markets (service
areas).
For Trinity Health, strategies must be developed for the hospital division,
outpatient facilities division, long-term care division, and so on. For the hospital
division key strategic questions may include, “How many hospitals are optimal?”
or “Which markets should Trinity enter with a new hospital?” This perspective
concerns a single business type and its markets. Therefore, it is quite different
from the corporate perspective of what businesses Trinity should be in.
Organizational-Level Strategy Within a division, individual organizational
units may develop strategies as well. These organizational-level strategies typically concern one organization competing within a specific well-defined service
area. For example, each hospital in Trinity’s hospital division may develop a
strategic plan to address its own particular market conditions. Key strategic
questions for this level of strategy may include, “What combination of hospital
services is most appropriate for this market?” and “What strategies are the competitors using to increase market share?”
Unit-Level Strategy Unit-level strategies support organizational strategies
through accomplishing specific objectives. Unit operational strategies may be
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STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS
developed within departments of an organization such as clinical operations,
marketing, finance, information systems, human resources, and so on. Unit strategies address two issues. First, they are intended to integrate the various subfunctional activities. Second, they are designed to relate the various functional
area policies with any changes in the functional area environment.38 In addition,
linkage strategies are directed toward integrating the functions themselves and
creating internal capabilities across functions (for example, quality programs or
changing the organization’s culture).
Strategy Hierarchy Strategic management may be employed independently
at any organizational level. However, it is much more effective if there is topdown support and strategies are integrated from one level to the next. For some
organizations, of course, there is no corporate or divisional level, such as with
a free-standing community hospital or independent long-term care organization.
For these organizations the question of scope and perspective and integration of
the strategy is much more straightforward.
The Importance of Leadership
Ultimately, strategic decision making for health care organizations is the responsibility of top management. The CEO is a strategic manager with the pre-eminent
responsibility for positioning the organization for the future. The leader must
be able to inspire, organize, and implement effective pursuit of a vision and
maintain it even when sacrifices are required.39 As a result, the leader must
have an ability to identify what needs to be done today and what can wait. They
prioritize constantly; aware that wars are lost by fighting on too many fronts.
They know the key messages to communicate from day to day, from audience to
audience.40 If the CEO does not fully understand or faithfully support strategic
management, it will not happen.
Leadership Roles throughout the Organization
In the past, strategy development was primarily a staff activity. The planning staff
would create the strategy and submit it for approval to top management. This
process resulted in plans that were often unrealistic, did not fully consider the
realities and resources of the divisions or departments, and separated planning
from leadership.
Over the past two decades, many large formal planning staffs have been
dissolved as organizations learned that strategy development cannot take
place in relative isolation. Therefore, the development of the strategy has
become the responsibility of key managers. The coordination and facilitation
of strategic planning typically may be designated as the responsibility of a single key manager (often the CEO), but the entire leadership team is responsible
for strategy development and its management. The rationale underlying this
approach is that no one is more in touch with the external environment (regulations, technology, competition, social change, and so on) than the managers
who must deal with it every day and lead change. The leadership team must
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
coordinate the organization’s overall strategy and facilitate strategic thinking
throughout the organization. As a result, the organization’s key top managers
act as an extension of the CEO to ensure that an organized and used planning
process ensues.41
Lessons for Health Care Managers
Strategic management is an often complex and 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 managing strategic momentum. In reality, these elements are blended together as the strategy is formed
and reformed through leadership, intuition, and organizational learning. Indeed,
implementing the strategy may actually create an entirely new, unintended
strategy.
The concept of strategic management has been successfully used by business
organizations, the military, and in government agencies; health care managers
are finding it essential for their organizations as well. The strategic management
model presented and discussed in this chapter may be applied to a variety of
types of health care organizations operating in dramatically different environments, is useful for both large and small organizations, and facilitates strategic
thinking at all levels of the organization.
The strategic planning portion of the model incorporates situational analysis,
strategy formulation, and strategy implementation. The strategic thinking activities within situational analysis combine to influence strategy formulation.
Strategy formulation in turn affects planning the implementation. Finally, the
strategy must be managed, evaluated, 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. Managing strategic momentum essentially continues strategic thinking
and strategic planning.
The strategic thinking map presented in this text is designed to provide the
essential logic of the activities involved in strategic management and therefore is
based on both analytical (rational) as well as emergent (learning) approaches for
understanding strategy making in organizations. The analytical model provides
an excellent starting point for understanding the concept of strategy and a foundation for comparing and contrasting strategies. However, the strategic thinking
map does not perfectly represent reality and must not be applied blindly or with
the belief that “life always works that way.” Strategic management is not always a
structured, well-thought-out exercise. In reality, thought does not always precede
action, perfect information concerning the environment and organization never
exists, and rationality and logic are not always superior to intuition and luck.
Sometimes organizations “do” before they “know.” For instance, the intended
strategies are often not the realized strategies. Sometimes managers are able
to just “muddle through.” Or, managers may have a broad master plan or logic
underlying strategic decisions, but, because of the complexity of the external
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and internal environments, incremental adjustments or guided evolution is the
best they can do.45
Managers must realize that, once introduced, strategies are subject to a variety of forces, both within and outside the organization. Sometimes we learn by
doing. Yet, without a plan (a map) it is difficult to start the journey, difficult to
create any type of momentum for the organization, and difficult to have consistent decision making. Thus, strategic managers begin with the most rational plan
that can be developed and continue to engage in strategic thinking. Effective
strategic managers become adept at “freezing” and “unfreezing” their thinking
and strategic plans as the situation changes.
Health Care Manager’s Bookshelf
H. Igor Ansoff, Corporate Strategy:
An Analytical Approach to Business
Policy for Growth and Expansion
(New York: McGraw-Hill, 1965)
Henry Mintzberg declared that the publication
of Corporate Strategy: An Analytical Approach
to Business Policy for Growth and Expansion by
H. Igor Ansoff was a major event in the world
of management. The book “represented a kind
of crescendo in the development of strategic
planning theory, offering a degree of elaboration
seldom attempted since.”1
Corporate Strategy is considered by many to
be the first book devoted exclusively to business
strategy.2 Ansoff uses the term strategic to mean
“pertaining to the relationship between the firm
[organization] and its environment.”3 Hussey
noted that with the publication of Corporate
Strategy “managers were offered, for the first
time, a book which took them through all the
steps of a formal approach to strategic decision
making” and provided a number of analytical
tools for aiding strategic thinking.4
Ansoff introduced the concept of synergy or
the familiar business rule of 2 + 2 = 5. Gilmore
and Brandenburg acknowledge their debt to
Ansoff for introducing this important concept,
which Ansoff developed while employed at
Lockheed Aircraft Corporation and continues to
be an essential part of much strategy formulation.5 Synergy is a critical concept as strategists evaluate the financial wisdom of entering
into strategies such as vertical integration and
differentiation.
Ansoff argued that an organization cannot define itself as simply being in the health
care, transportation, or energy business. These
definitions are too broad to define the common
thread. The common thread is the relationship
between present and future services, products, and markets which “enable outsiders to
perceive where the organization is heading,
and inside management to give it guidance”
(p. 105). It was with regard to this common
thread that Ansoff developed and introduced
the product–market matrix. This matrix became
so popular that even 30 years later Ansoff
received a request to reprint the matrix every
three or four months.6
Ansoff ’s Corporate Strategy is an important milestone in the evolution of strategic
CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT
management. Strategic managers will appreciate the care with which Ansoff related his
innovative concepts to leading organizations.
Melvin Anshen emphasizes the value the book
has to managers and scholars because it “identifies and precisely orders the discrete, sequential
building blocks of logical analysis as applied to
the design of planning for strategy growth.”7
Walter Schaffir underscored the importance of
…
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