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Introduction to Strategic Management

Learning Objectives

After reading this chapter, you should be able to:

• Evaluate the complexity of strategic management and how it is critical to achieving ongoing and future business success.

• Describe how healthcare services organizations (HSOs) compete for consumers.

• Compare and contrast free market attributes that apply to business competition and attributes that affect competition in healthcare services organizations.

• Analyze what constitutes “success” in business.

• Identify common strategies used by healthcare services organizations.

• Describe the various strategic pathways an HSO can choose when implementing its strategy.

• Discuss the fine distinction between a strategy and a business model.

• Describe the range of stakeholders to whom healthcare services organizations owe some duty.

Chapter 1 Age Fotostock/Superstock

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CHAPTER 1Section 1.1 What Is Strategic Management?

You are about to embark on a journey where you will learn what managing a large or small healthcare services organization is all about and how to plan and manage an orga- nization to realize its long-term vision, purpose, strategy, and objectives. To be successful, organizations providing healthcare services must continually address rapid changes in the marketplace and constantly seek new opportunities. This leading and managing an organization for long-term success is really what strategic management is all about.

The healthcare industry comprises various sectors, including medical equipment and sup- plies, pharmaceutical, healthcare services, biotechnology, and health insurance. In this book, you will learn about strategic management in healthcare services, a sector with unique issues and relationships affecting business success. Healthcare services organiza- tions, or HSOs, are businesses whose purpose is to provide healthcare services directly to consumers. HSOs include hospitals, nursing homes, home health services, outpatient pro- viders such as physician clinics, urgent care centers, rehabilitative services, public health clinics, and the like. The defining characteristic of a healthcare service organization is patient care, provided by physicians, nurses, therapists, and other clinical staff.

Chapter 1 sets the stage for understanding the topic of strategic management and the key concepts that underlie it. You will need to become familiar with many new terms that are vital to understanding concepts in later chapters.

1.1 What Is Strategic Management? Strategic management is nothing less than steering and managing an HSO to be success- ful over time—not just for the next quarter or year, but for the long term. It involves decid- ing the direction in which the organization should go and what products and services the organization should offer. It requires identifying who its competitors are and how it might best them. It means accurately identifying its consumers and knowing what they want. It entails determining whether it can produce the kinds of services consumers want to buy, whether it has the people and organizational structure to make it all happen, and, most important, how to make a profit when all is said and done. No problem, right?

David Dea/iStock/Thinkstock

Strategic management involves the ability to assess and accommodate external challenges such as healthcare reform.

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CHAPTER 1Section 1.1 What Is Strategic Management?

The healthcare services sector has had a few notable failures—the 1998 bank- ruptcy of Allegheny Health, Education, and Research Foundation (AHERF), a 14-hospital system in Pennsylvania, is one example. For HSOs, managing strategically can be very difficult to do year after year. And how does strate- gic management differ from ordinary management? If one were suddenly called in to manage an ambulatory surgery center that continued to do what it had been doing and all one had to do was make sure it was done well, we might say that constitutes ordinary management. However, if one worried about external challenges— healthcare reform legislation, rising personnel and supply costs, changing patient demographics, public reporting of quality measures, and pay-for-performance, to name a few—and began to look at how the surgery center might have to change to meet those challenges, what that change would cost, and where the money would come from so the center could stay in business, then that would constitute strategic management.

The Strategic Management Model

Although strategic management is complex and difficult, it can be understood and learned. Just as you need a diagram, instructions, and tools to assemble a kit, so too do you need a process or model for strategic management. Most writings on strategic man- agement are based on a model, which can be thought of as a conceptual representation of a device, process, or system that enables one to visualize how the different parts, or elements, of the system relate to one another. Models provide us with a road map as to how everything fits together. While a model enables the components of such a complex activity to be examined separately and in detail, it cannot begin to describe the difficul- ties that constantly arise in the real world as people try to put a conceptual model into practice. Figure 1.1 presents the strategic management model on which this text is based.

David Dea/iStock/Thinkstock

Strategic management involves the ability to assess and accommodate external challenges such as healthcare reform.

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CHAPTER 1Section 1.1 What Is Strategic Management?

Figure 1.1: The strategic management model

Source: Adapted from Abraham, S. C. (2006). Strategic planning: A practical guide for competitive success. Miami, OH: Thomson South- Western. © Emerald Group Publishing Limited.

Strategic Thinking

Strategy Formulation

Strategy Implementation

Leadership, governance, structure, values, and culture (Chapter 2)

Explore alternative futures (Chapter 3)

Search for alternative business models (Chapter 3)

Conduct external analyses (Chapter 4)

Conduct internal analyses (Chapter 5)

Determine key strategic issues (Chapter 6)

Develop viable strategic alternatives (Chapter 6)

Choose the best strategy (Chapter 7)

Operational and budget planning (Chapter 8)

Implementation and tracking (Chapter 9)

Feedback and control, managing the process (Chapter 9)

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CHAPTER 1Section 1.1 What Is Strategic Management?

Elements of Strategic Management

To appreciate and understand the totality of strategic management, you have to under- stand all its elements and how they affect one another. By way of analogy, consider a sys- tem like the human body where each part affects and is affected by other parts. When you work in an HSO and experience what your employer does every day and what it manages to achieve (or not), recall what you have learned from your study of strategic manage- ment. The training in strategic management and the real-world experience you obtain will help you advance in your career, perhaps one day even to the position of chief executive officer. It is at this level, with a view of the entire organization and its environment, that the responsibility for strategically managing an organization lies.

Strategic management involves three discrete steps: (1) strategic thinking, (2) strategy for- mulation, and (3) strategy implementation. These steps are affected by the organization’s leadership, governance, structure, values, and culture.

Strategic Thinking Strategic thinking is an ongoing activity with the aim of seeking out better strategies and business models. It encompasses several different areas:

• Exploring alternative futures: This exploration involves consideration of possible events that may influence the way healthcare changes and affects the organiza- tion. This may involve creating scenarios of plausible alternative projections of a specific part of the future.

• Searching for alternative business models: This is a structured way of looking at the organization’s business model for the purpose of improving the business model or finding a better one.

• Conducting external analyses: External analysis entails observing, analyzing, and understanding what is changing in the external environment to anticipate what the future might hold. The external environment includes regulatory requirements, technology trends, financing options, consumer expectations, and the like.

Strategy Formulation Strategy formulation, sometimes referred to as strategic planning, is a multifaceted pro- cess that involves the following activities:

• Conducting internal analyses: An internal analysis enables you to examine and understand everything about the organization itself, especially what makes it a strong competitor or why it is not as strong as it could be. Does it have a core competence, an enabling culture, strong leadership, adequate financial resources, and a good understanding of its consumers?

• Determining key strategic issues: This activity involves the synthesis of the external and internal analyses to focus management’s attention on the most important issues the organization faces and viable strategic alternatives. Viable strategic alternatives are bona fide strategic options or alternative futures from which the best option can be chosen. They consist of strategies, strategic intent, programs, and methods of financing.

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CHAPTER 1Section 1.1 What Is Strategic Management?

Strategy Implementation Some experts suggest that strategy implementation comprises as much as 90% of strate- gic management. Strategy implementation is all about successfully executing the strate- gies developed in the thinking and planning phases, thereby enabling the organization to achieve the vision and meet the objectives set by management. The first step is opera- tional and budget planning to determine who will do what to implement the strategy and to ensure that the organization has the resources—money, people, and know-how— to do these things. One consideration in this stage is determining how progress will be measured.

The actual performance of the myriad tasks involved in implementing the strategy is called operations. An information system to collect and analyze operational data must be devised and constructed. Actual performance must be measured at regular intervals and the data entered into the system to compare against planned estimates. When things do not go according to plan or resources are being wasted, corrective action should be taken immediately. Lastly, the strategy planning process itself must be managed and improved on an ongoing basis.

Figure 1.1 also shows which chapters present the various parts of the strategic manage- ment process. Adjustments must often be made in response to challenges and changing conditions. These strategy modifications affect next year’s assessment of the organization. A strategically managed healthcare services organization is constantly updating its infor- mation and mental models to take into account the changes occurring both internally and externally.

People have their own ideas about things in the world around them. Sometimes they know very little about something, and sometimes they know a lot. What we know or think we know about something forms our mental model of it. For example, our mental models about pollution may not be well formed. Pollution is a complex topic with many facets, and our motivation for learning more about it and what needs to be done may be low. Most people were probably not aware that ships had for years been dumping plastic waste into the Pacific Ocean on the assumption that, in the vastness of the ocean, this would go unnoticed and no harm would be done. Their mental model of marine pollution was likely not based on personal observation but limited to what they might have occasionally read in newspapers. For many, that mental model must have been radi- cally updated when a series of articles about ocean pollution revealed the existence of the Pacific Trash Vortex, consisting of non-biodegradable plastics floating in the “western gar- bage patch” off the coast of Hawaii and the “eastern garbage patch” off the United States’ continental coast. The latter was estimated to be twice the size of Texas (Weiss, 2006). In another example, we are all familiar with private physician clinics and no doubt think we have pretty good mental models of how those facilities work. But can you imagine a world without free-standing primary care clinics, at least in their current form? There’s a good chance that might happen in the next few years (Hoff, 2013). If that happens, we will have another mental model to update.

For our purposes, the steps of strategic management are best explained while examining HSOs that do business only in the United States. This approach is used throughout the book. Although a few U.S. HSOs do business internationally, these operations are consid- erably more complex to plan for and to manage.

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CHAPTER 1Section 1.2 About Healthcare Competition

Discussion Questions

1. What are the principal elements of the strategic management process? How are they interrelated?

2. How does strategic thinking differ from strategic management? 3. What part of strategy formulation appears, in your opinion, to be the most difficult to do?

Which part, if not done well, would be most likely to lead to poor strategic decisions? 4. What part of doing strategy implementation appears, in your opinion, to be the most dif-

ficult to do? Which part, if not done well, would be most likely to lead to poor strategy execution?

The coming sections in this introductory chapter explain the context of business in health- care services, what is meant by “success,” more precise definitions of strategy and strate- gic formulation (among the most misused and misunderstood words in business), what business models are and why every business has one, and the importance of stakeholders in business decision making. The remaining chapters in the book explore in greater detail each of the major elements of strategic management and clarify them. In the end, you will have a conceptual grasp of how everything fits together. To be successful at strategic man- agement takes years of practice and accumulated experience, often people’s entire careers.

1.2 About Healthcare Competition In this section, we’ll begin to examine the different kinds of competition in the healthcare industry and how players in the healthcare services sector compete.

Free Versus Regulated Markets

Capitalism allows a free market to exist and promotes competition. The United States is a mixed economy, which means some markets are freely competitive with almost no gov- ernment intervention, and some are highly regulated, making competition very difficult. There are few markets without some type of regulation affecting competition. One unreg- ulated market that comes to mind are household garage sales hosted by private individu- als, but even these business endeavors may face local signage regulations. Considered to be a public good, healthcare services are a regulated market. Other regulated markets include communications, energy, insurance, food production, trucking, and airlines.

Industries Versus Markets

The terms market and industry are often used interchangeably in everyday usage, but they have quite distinct meanings. The collection of firms that provide similar products or ser- vices to the same customers is called an industry. The healthcare industry, for example, is a collection of diverse groups of businesses involved in some aspect of healthcare ser- vices. HSOs are one sector in the much larger healthcare industry. The buyers for products or services are collectively called the market. For HSOs, buyers are patients or clients and groups paying for healthcare services such as government-sponsored and private

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CHAPTER 1Section 1.2 About Healthcare Competition

insurance plans. The buyers for biotechnology companies, another sector in the healthcare industry, are primarily pharmacies and HSOs.

How Firms Compete in an Industry

In the overwhelming majority of industries, firms compete with each other to sell more products or services to customers, their purpose being to “capture more of the custom- er’s dollar.” Often, companies are free at any time to offer whatever products they think people need at any price they believe people are willing to pay. If they succeed, custom-

ers will buy their product; if not, they won’t. That’s the nature of competi- tion. The fact that competition creates winners and losers inspires firms to constantly improve.

Competition in many sectors of the healthcare industry functions dif- ferently. The usual free market prin- ciples of supply and demand are distorted by an extensive regulatory framework at both the federal and state levels of government. State regulators may not allow all HSOs in one geographical market area to offer particular services. Price caps may prevent HSOs from charging what- ever price people are willing to pay for healthcare services. Pharmaceuti- cal companies are free to develop any new medication they want but must

get approval from the Food and Drug Administration before it can be sold in the United States. Insurance plans may direct people to receive services from certain HSOs and not others. Hospital emergency departments must provide healthcare services to people even if they cannot pay for those services.

In many industries, consumers, whether individuals or businesses, communicate through their buying behavior exactly what goods and services they need. Companies that fail to deliver products that satisfy customers’ needs will soon go out of business. Consumer buying behaviors in healthcare services are not such clear indicators of consumer satisfac- tion. People needing healthcare services have little control over what services are needed and when. During a medical emergency, people seek services from the nearest HSO with- out regard to price. Insured individuals and people eligible for public assistance are insu- lated from most of the costs of their decisions on healthcare treatment. The result is that many consumers, even in nonemergency situations, have limited incentive to search for lower-cost healthcare services. Even when price is a factor, hospitals are often unwilling or unable to provide consumers with any sort of price estimate (Rosenthal, Xin, & Cram, 2013). HSOs have to compete for inclusion in insurers’ provider networks by controlling costs and providing patient-centered amenities. Failure to deliver healthcare services that satisfy insurers’ needs will cause an HSO to lose its contract with the insurance company.

ABK/BSIP/BSIP/SuperStock

Consumer buying behaviors in the healthcare industry are not clear indicators of customer satisfaction; in emergency situations, individuals seek services without regard for price.

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CHAPTER 1Section 1.2 About Healthcare Competition

Differentiation Companies can compete by being differentiated, that is, by developing a strong and dis- tinctive brand, along with unique or different products. Through differentiation, they can charge more for their products, because in the consumer’s mind they are offering some- thing that no one else is offering. Examples of this are a designer perfume or a Porsche automobile. An example of this in healthcare is what is called concierge medicine offered by some primary care physician groups. This unique service, sometimes called boutique medicine, involves people paying an annual fee or retainer to receive enhanced physician services (Boden, 2011).

Differentiation can, depending on the product or service, be achieved by offering cus- tomers superior quality, product features, technology, convenience, selection, style, per- formance, safety, comfort, reliability, cost savings, warranties, a return policy, customer service, and so on. The key is to differentiate based on the customers’ needs, not on what the business thinks they need. When consumers perceive that your product or service alone best meets their need, they will buy it and be willing to pay more for it.

Businesses can compete based on many other factors beyond product or service attributes. Durable medical equipment companies may offer customers on-time delivery of home care equipment. Hospitals may gain various awards for specialty care programs, such as the Joint Commission’s certificate of distinction for primary stroke centers. Teaching hos- pitals may offer patients opportunities to participate in medical research studies. The list is endless. As with product and service differentiation, the point is to address the needs of the customer or healthcare consumer.

Cooperation HSOs are increasingly cooperating with other organizations rather than competing, or doing both. They do this through partnerships, agree- ments, and joint ventures. Is cooperating really competing? In the healthcare industry, the answer is often yes. Doctors, hospitals, and other HSOs are coming together to provide coordinated ser- vices to groups of patients. Often called account- able care organizations, these consortiums of competitors seek a competitive advantage in gaining contracts with private insurers and high rates of reimbursement from public insurers such as Medicare and Medicaid. Such an instance of cooperation is described as an agreement or stra- tegic alliance, where organizations partner for their mutual benefit but retain their distinct iden- tity. There are other kinds of strategic alliances, discussed later in this chapter, including simple contracts for services rendered at one end of the scale (minimum commitment) to minority own- ership of another organization or joint venture at the other (heavy commitment). Case Study:

延幸高橋/iStock/Thinkstock

In the healthcare industry, competitors may partner for their mutual benefit but still retain their identities; such a strategic alliance is called an accountable care organization.

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CHAPTER 1Section 1.2 About Healthcare Competition

Cooperation Is Hospital’s Strategic Imperative illustrates how a facility might reach out to strategic partners to improve operational efficiency and financial performance.

Case Study: Cooperation Is Hospital’s Strategic Imperative

Western Hospital is a 400-bed publicly owned teaching facility. Like many public hospitals, it is struggling with the financial challenges of serving patients who have limited resources. Unemploy- ment in the community is 11%. More than half of the hospital’s patients are uninsured or covered by the state’s Medicaid insurance plan. Although patient volumes have increased each year, so have the losses associated with bad debt.

Hospital leaders anticipate even higher patient volumes as more people will be insured through Medicaid or commercial health plans as a result of the 2010 Patient Protection and Affordable Care Act, a piece of legislation that represents a significant government and regulatory overhaul

of the U.S. healthcare system. Because Medicaid payment rates typically do not cover patient care costs, the hospital will need to attract a greater number of patients with commercial insurance to offset bad debt and low Medicaid reimbursement.

Western Hospital has begun to retool its model of patient care delivery to more efficiently provide quality care while managing the expected operational strains of higher patient volumes. These plans include several cooperative initiatives:

• Partner with the county to administer its low income health program, which involves creating patient information linkages among the hospital, clinics, physicians, and out- patient services.

• Implement patient-centered medical home initiatives in its primary care clinics, which requires cooperation from community and public health providers.

• Collaborate with specialty and primary care physicians to define “best practice” roles, services, and referral mechanisms for patients with chronic conditions.

• Add seven residents to its family medicine and internal medicine residency programs. • Contract with three additional community-based physicians to meet the needs of hos-

pitalized patients with specialty needs. • Add two community-based physicians to the hospital’s governing board to more

actively involve the medical staff in strategic decision making.

The Patient Protection and Affordable Care Act, which was signed into law by President Obama in March 2010, contains a series of measures to expand insurance coverage and control rising healthcare costs.

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CHAPTER 1Section 1.3 What Is “Success”?

1.3 What Is “Success”? Most HSOs have one or more purposes they are trying to achieve. These purposes can be construed to represent what the business considers “being successful.” The mission of an HSO may be to provide the best patient care with business survival as the underlying purpose. Survival means having the ability to continue meeting operating expenses and investing in new strategies. Surviving means enduring so the mission can be fulfilled. Other measures of success for HSOs include the ability to make a profit, to maintain or grow market share, to increase net worth and shareholder value, and to develop strong brand equity.

Profit

Profit is one popular reason why HSOs stay in business. Profit is the difference between revenue and expenses in addition to nonoperating gains and losses. Even HSOs desig- nated as nonprofit entities must have more revenue than expenses, or survival is jeopar- dized. A nonprofit organization may make a “profit,” but it does not distribute its profit to individuals or shareholders as can a for-profit organization. Net profit is what is left over after all allowed expenses have been deducted from revenue over a specified period. For taxable organizations, this “bottom line” is called the net income after taxes (NIAT). Nonprofit does not necessarily mean tax exempt. Other kinds of profit, evident on any organization’s income statement, include gross profit; operating profit; earnings before interest, taxes, depreciation, and amortization (EBITDA); earnings before interest and taxes (EBIT); and net income before taxes (NIBT).

Operating revenue—income earned by delivering patient care services—is the primary source of HSO revenues. This revenue is further divided into two categories. Gross patient service revenue (GPSR) is the amount of money the HSO would make if it were paid the total amount billed for services delivered. However, many HSOs are paid dis- counted rates, based on negotiated contracts with insurance plans rather than the full billed amount, and they never actually collect the full gross revenue. Net patient service revenue (NPSR) is the amount of money the HSO actually collects after deducting charity care and insurance contractual adjustments. Charity care represents services provided for which payment is never expected or for which the patient is never billed.

Discussion Questions

1. You manage an urgent care center that is not affiliated with other HSOs. Who might your competitors be? How might you cope with some of these competitive threats?

2. Competitors are usually thought of as other HSOs like yours offering similar healthcare ser- vices in the same market. What other businesses or factors might reduce overall demand for your services?

3. Would you be willing to pay more for healthcare services that no one else is offering, such as concierge medicine? What if your insurance plan did not cover these extra costs?

4. Over the last 5 years or so, do you believe more HSOs are cooperating with one another? Why or why not?

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CHAPTER 1Section 1.3 What Is “Success”?

Maintaining financial stability is very different for nonprofit HSOs because they cannot easily access the public equity markets as can for-profit HSOs. Nonprofits rely on phi- lanthropy (monetary gifts from individuals and organizations) as a potential additional source of funds. Both nonprofit and for-profit HSOs also make money from ongoing busi- ness activities that are not directly related to the main mission of providing patient care services. Some typical sources of this other operating revenue include space or equip- ment rentals, research grants, funding from healthcare suppliers to test new products, and investment income. Publicly funded HSOs, such as health departments, are financed by tax revenue, bonds, and other public funding mechanisms and may also receive some philanthropic gifts.

In addition to measuring profit, success can also be judged by the actual flow of money that comes in and goes out of the HSO. While this measure can change from month to month, over several accounting periods, analysis of cash flow provides an objective perspective of an organization’s ability to meet its operating expenses and invest in new strategies.

Market Share

Another measure of success is market share, which can be defined as a firm’s annual sales as a percentage of the annual sales of its industry or segment. Some HSOs want to be a market leader, whereas most aim to maintain or incrementally grow market share. What is not so obvious to an organization wanting to increase market share is that revenues have to grow faster than total industry revenues to achieve this goal. An example is a health system that recently acquired a metropolitan hospital specializing in cardiac (heart) care to increase its dominance in this specialty market. The investment caused the health sys- tem’s revenue to grow faster than total industry revenues. Many HSOs lack the ability to make such substantial financial investments to grow market share. Market share can be maintained if an HSO’s revenue grows only as fast as the industry. If revenue growth lags behind the industry, an HSO may actually lose market share.

There is no one correct way to cal- culate market share. HSOs often monitor the total sales of the served market. The served market repre- sents all buyers able and willing to purchase or use the service (Berkow- itz, 2010). For instance, after purchas- ing the metropolitan cardiac hospital, the health system can calculate its success at increasing market share by measuring its served market share of coronary bypass procedures. This figure represents the total number of procedures performed as a percent- age of the total number of bypass procedures done in its service area.

fatih donmez/iStock/Thinkstock

HSOs that want to increase market share must have revenues that grow faster than total industry revenues.

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CHAPTER 1Section 1.3 What Is “Success”?

For publicly funded HSOs, such as community health centers, the served market is all people in a geographic area who are eligible for free or subsidized services (often with incomes less than 200% of the federal poverty level) and who are willing to use clinic ser- vices. The health center would calculate the percentage of that group receiving services at the center to determine its share of the market.

Another measure of market share is known as relative market share. This is a calculation of the percentage of an HSO’s sales compared to its largest competitor or the combined sales of the three largest competitors. Comparing sales among HSOs can be problem- atic due to the wide variations in pricing practices. Some healthcare market data can be obtained from federal, state, or local health regulatory agencies. Market share measure- ment data is also available from private, commercial companies.

Shareholder Value

If an HSO is a publicly traded, for-profit entity, shareholder value is one measure of suc- cess. Examples of publicly traded HSOs include Hospital Corporation of America based in Nashville, Tennessee; Tenet Healthcare Corporation based in Dallas, Texas; HealthSouth Corporation based in Birmingham, Alabama; HCR ManorCare based in Toledo, Ohio; and Amedisys Inc. based in Baton Rouge, Louisiana. Shareholder value is a computed value based on an HSO’s projected cash flows for the next 10 years, discounted to the present time using discounted-cash-flow (DCF) analysis and an appropriate discount rate. From that computed value is subtracted all current debt. If computed exactly the same way, even using different discount rates over time, one can keep track of shareholder value and use it as a criterion in decision making and investing (Rappaport, 1997).

The primary goal of a for-profit HSO is to return dividends to shareholders, or profit to owners, over time. Nonprofit HSOs seek to further their mission, which includes making enough money to succeed. Both have excess revenue as a goal; the difference is how that revenue is used or distributed.

Michael Raynor, who came to prominence for his contribution to the idea of disruptive innovation, believes that for-profit companies should adopt as their main purpose sur- vival rather than shareholder value (Raynor, 2009). His thesis questions the choice of the shareholder as the most important stakeholder because shareholders are “owners” of the corporation and therefore deserve to have their investment maximized. Instead, as he says, “A stock certificate is a particular sort of claim on corporate wealth . . . not a deed of ownership” (Raynor, 2009, p. 5). More accurately, as suppliers of capital to the corpora- tion, stockholders deserve to be paid enough to keep them investing, just as employees deserve enough payment to keep them motivated. Rather than maximizing stockholders’ returns at the expense of returns to other stakeholders, Raynor advocates being fair to all suppliers of inputs at a level that guarantees their continuation to ensure the corpora- tion’s survival.

Net Worth

Calculating the net worth or value of an HSO is usually done only if the organization wants to be acquired or if it wants to issue shares to investors. In that case, what is typically

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CHAPTER 1Section 1.3 What Is “Success”?

done is that a valuation consultant is engaged and uses several (usually 3–5) valuation methods, eventually taking an average. Not until an organization is actually bought is its true worth or market value established. Market value is distinct from book value, which is what is reflected on the organization’s balance sheet and takes into account its depreci- ated and amortized assets, inventory, and goodwill. Market value represents the value an asset might fetch if sold on the open market. For example, the established patient base of a physician clinic (part of goodwill) has one value to the clinic’s accountant and perhaps far more value to an acquirer.

Brand Equity

A brand distinguishes an organization’s product or service from others and can include a name, term, design, or symbol. Brand equity or brand strength refers to the power of a brand to influence purchases and loyalty. Having a strong reputation, brand, or brand equity is also an indicator of competitive success. These signify a successful differentia- tion on strategy and, more than likely, a sizable market share, strong revenue growth,

and healthy profits. An HSO is doing well on this criterion when purchasers buy its services because its brand is the primary reason for their purchase decision. An example outside of the healthcare industry is Coca-Cola. Many people when they are thirsty go for a Coke because of strong brand loyalty.

For some healthcare organizations, having a strong reputation provides a competitive edge. Each year, U.S. News and World Report publishes a list of the “Best Hospitals” in the United States. Hospitals like Johns Hopkins in Baltimore and University of Texas M.D. Anderson in Houston consistently appear on this list. This “best hos- pital” brand is part of these hospitals’ marketing strategies. This competitive edge was also evident in 2012 when Walmart entered into agreements with just six HSOs nationwide to provide specific heart, spine, and transplant surgeries for its health- plan-covered employees. The employees will have no out-of-pocket expenses if these HSOs are used for the procedures. The participating HSOs have a reputation for high-quality, cost-efficient patient care: Cleveland Clinic in Cleveland; Geis- inger Medical Center in Danville, Pennsylvania; Mayo Clinic sites in Rochester, Minnesota, Scott- sdale/Phoenix, Arizona, and Jacksonville, Flor- ida; Mercy Hospital Springfield in Springfield, Missouri; Scott & White Memorial Hospital in Temple, Texas; and Virginia Mason Medical Cen- ter in Seattle, Washington (Wohl, 2012).

MCT via Getty Images

The brand strength of Johns Hopkins Hospital in Baltimore was built partly on its numerous medical achievements; in 2013, soldier Brendan Marrocco became the first successful double arm transplant at Johns Hopkins Hospital.

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CHAPTER 1Section 1.3 What Is “Success”?

Discussion Questions

1. Imagine you are a hospital CEO. What measures of success might you adopt to judge whether the money spent on patient care is being used wisely?

2. What measures might you look at personally to assess how happy you are? 3. It is a widely held belief that it is enough for an HSO to be profitable. Is it? What other mea-

sures might you consider using to help ensure that the HSO will still be in business 5 years from now?

4. Imagine you are on the verge of retiring. Looking back on your career, how would you gauge your success?

5. How might you know if the HSO you work for has a competitive advantage over its competitors?

Brands and reputations can increase, remain the same, or erode over time if efforts to maintain them aren’t made. The main reasons for brand erosion are competitors duplicat- ing the quality of a brand so that it is no longer unique or a company failing to perform in ways that the brand promises. If many HSOs improved quality and better contained costs for heart, spine, and transplant surgeries, would Walmart still encourage its health-plan- covered employees to use only select facilities?

The Inexorable Pace of Change

Remaining a successful HSO is an ongoing challenge. The healthcare industry today is changing at an ever-faster pace compared to even a few years or a decade ago. Much of this change is driven by continued increases in the cost of healthcare services. From 2000 to 2010, national health expenditures increased at an average annual rate of 6.6%, which eclipsed the annual rate of gross domestic product growth of only 4.1%. National health expenditures were $1,378 billion in 2000 and almost doubled to $2,600 billion in 2010 (Holahan et al., 2011).

The rate of change is not likely to slow, as evidenced by The National Strategy for Quality Improvement in Health Care (the National Quality Strategy) published by the U.S. Depart- ment of Health and Human Services (HHS). This strategy established a roadmap for achieving improved health and healthcare for all Americans (U.S. Department of Health and Human Services, 2012).

Many legislative, regulatory, and reimbursement changes necessary to support the National Quality Strategy will affect HSOs. Most notable are the game-changing aspects of the 2010 Patient Protection and Affordable Care Act that encourage HSOs to form new market relationships through accountable care organizations or other mechanisms. Trans- forming the current mode of healthcare delivery to bring about efficiencies in consumption of services while lowering overall costs are goals that will take several years to achieve.

Ethical behaviors by both individuals and businesses are also changing, but perhaps in the wrong direction. It appears that corruption, bribery and kickbacks, conflicts of inter- est, and greed are rampant in the United States and, regrettably, becoming more the norm than the exception (Fisman, 2009). Spreading like the plague, unethical behavior has infected politics at every level, the highest echelons of business, and industries like

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CHAPTER 1Section 1.4 What Is Strategy?

pharmaceuticals, real estate development, healthcare services and insurance, and banking and financial services. People seem far more motivated now by personal financial gains than by what is good for the company, the public, or other people. This trend, unsettling as it is, has profound implications as to how HSOs are run and even how they compete.

Discussion Questions

1. Discuss elements in your own life that have changed faster than you would have imagined. How did the changes happen?

2. What healthcare services are available now that did not exist 5 years ago? Three years ago? 3. What are some healthcare services that will become available in the next 3–5 years that are

not now available? What do HSOs have to do to make these services available (besides, of course, having the necessary technology)?

4. How can an organization’s strategy planning process take into account very rapid changes in its environment?

5. In which areas of healthcare services do you think the most profound and rapid changes are occurring? Why?

1.4 What Is Strategy? Strategy is how a company actually competes (Abraham, 2006). This is a simple yet effec- tive definition. It tacitly recognizes that companies could have a bad or unsuccessful strat- egy and hence not be able to compete well. Typical definitions of strategy are, in fact, definitions of a good or ideal strategy. While these are commonly accepted terms, there is no agreement on a single definition of good or ideal strategy. In this section, the most com- mon strategies are introduced, grouped for convenience into four main categories: con- centration strategies, innovation strategies, technology strategies, and generic strategies. Whether an HSO is nonprofit or for profit can affect what strategy it chooses to pursue.

The Strategy Formulation Process

First and foremost, strategy formulation is a process. An HSO collectively tries to agree on where it is going (its vision) and how it is going to get there (its strategy). These are the two principal purposes of strategy formulation. Other valid purposes include achieving “success” as the organization defines it, such as increasing its market share, long-term profitability, or shareholder value. Yet another purpose could be to develop a core competence—a capability that gives an organization a strategic or competitive advantage—and sustainable competitive advantage. Consequently, identifying the pur- pose or purposes to be achieved is an integral part of the process. How and whether those purposes are achieved in reality is the job of the strategy (and management in implementing it). So choosing the right strategy is crucial. This is another answer to the question, “Why have a strategy?” It also answers the question, “Why engage in strategic planning?”

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CHAPTER 1Section 1.4 What Is Strategy?

A critical dimension of strategy formulation is who gets to participate in the process. In a few organizations, only the CEO participates with the mindset that whatever he or she says goes. In others, the top-management team participates and then relays what has been decided to lower management levels and employees in general. In still others, the partici- pants include those who will help implement the plan—middle managers and other key people in addition to top management. Chapter 8 outlines a suggested strategy formula- tion process and elaborates on the importance of involving the right people in the process.

Strategy formulation outcomes are dependent on who participates, the particular process used, and the information on which decisions are based. Because of these variables, plan- ning remains very much an art. It is a highly creative yet disciplined process that draws on the intuition, experience, know-how, and powers of persuasion of those involved.

While the strategy formulation process is relatively straightforward, actually doing it is much more difficult for a number of reasons. People seldom agree on where the orga- nization stands right now and how it is performing. This disagreement occurs because they have a limited perspective, do not have access to the same data, or have personal or hidden agendas. Sometimes politics gets in the way of truthfulness. The information that the organization and its people possess (for example, on market share and competitors) may be incomplete, dated, inaccurate, or irrelevant, while the information they most need is often unavailable. Lastly, the planning horizon is typically 3 to 5 years in the future, a future that is unknown, ambiguous, and changing before our very eyes.

Besides deciding on a vision and the best strategy for achieving it, strategy formulation is often used to make other strategic decisions. Strategic decisions differ from operational or tactical decisions primarily because their complexity and consequences are more con- sequential for the organization. For this reason, strategic decisions tend to be made only after appreciable analysis, discussion, and debate among a number of people. Examples of strategic decisions include selecting a strategy, deciding which entity to acquire or merge with, choosing which technology to adopt, deciding whether to form a strategic alliance and with whom, which new CEO or medical director to hire, whether to enter another segment of the healthcare services market, and so on.

Operational decisions are made subsequent to the strategic planning process. The reason is that operational decisions and plans flow from the strategic decisions made, and so the latter must precede the former. Operational decisions are made when doing operational planning (discussed in Chapter 7) and involve deciding what has to be done (programs, activities, tasks, projects), who will do it, who is accountable, what amount of budget is allocated, and a deadline for completing it. Examples of operational decisions include upgrading the electronic health record system, hiring additional clinical staff, reducing costs, financing a particular initiative, investing surplus cash, and so on.

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CHAPTER 1Section 1.4 What Is Strategy?

Discussion Questions

1. Some large healthcare systems have to look 20–30 years into the future when making decisions. How might strategy formulation be different for those with such long planning horizons? What other information or analysis might they require to help them make more robust decisions?

2. We know that operational decisions flow from strategic decisions and must be made subse- quently. Are they less important? Why or why not?

3. Managers who are used to making and following operational and tactical decisions are often promoted to executive-level positions. Explain what difficulties they might encounter as they transition from making operational decisions to making strategic ones.

4. The CEO of a small nursing home company with four facilities has been making all the deci- sions for the past 20 years, and the company is doing well. What can you say about the manager’s decision making? On the face of it, one might conclude that no strategic manage- ment is taking place. Would you agree?

5. Why is hiring a CEO or medical director a strategic decision but hiring anyone else is not? Hiring what other position might be strategic and under what conditions?

Concentration Strategies

A concentration strategy is some combination of producing an existing, improved, or new product or service for an existing, expanded, or new market. It is useful to think of a concentration strategy as being one of the following types.

Product- or Service-Development Strategies Product- or service-development strategies entail continuing to produce an existing product or service, improving them over time, and introducing new ones, all for the same market. The best examples outside of the healthcare industry are the auto companies that bring out improved versions of every model every year and, usually every four years, redesign every model. They periodically also introduce completely new models. Some HSOs employ this strategy, continuing to provide the same services with some improve- ments over time and with few major redesigns. The ability to launch new services can be somewhat restricted by local and state health planning regulations.

Market-Development Strategies Market-development strategies involve penetrating an existing market, expanding into related markets, or finding new markets for the existing products or services a company produces. A physician clinic might increase outreach to senior residential living centers in hopes of gaining more affluent patients. A hospital might expand its presence by opening drop-in clinics in shopping malls. A healthcare system might add an insurance product to its offerings. A nursing home might start an adult day care service. If a healthcare system does business in only one state, expanding to other states and eventually nationally or internationally is a way of finding new markets.

Ryan McVay/Photodisc/Thinkstock

A hotel-style concierge desk in a hospital lobby is one market-development strategy being employed by HSOs.

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CHAPTER 1Section 1.4 What Is Strategy?

A combination of product- and market-development strategies is employed when expand- ing a market or finding a new market that requires modifying the product. Examples of this are physician services redesigned for in-home rather than office visits. Health systems that branch out internationally must revamp ser- vice offerings to comply with diverse regulations, differing delivery systems, and multicultural patient preferences.

Sometimes modifying a service is the only way of expanding the market. By providing evening and weekend patient appointments, physician clinics attract new consumers. Adding complimentary valet parking makes it easier for consumers to get healthcare services at a crowded city location. Many hospitals are adding a hotel-style concierge desk to help patients and families with all types of personal services—from transportation to restau- rant reservations. Most concentration strategies fall into this combined product- and market- development category.

Conglomerate-Diversification Strategy A conglomerate-diversification strategy is one in which a company introduces a brand new prod- uct or service for a new market. The Affordable Care Act has resulted in this strategy being applied more often in healthcare. For instance, insurance companies are seeking to play a larger role in healthcare delivery. One example is a recent deal in which Pittsburgh-based insurer Highmark purchased seven Pennsylva- nia hospitals. Hospitals also are going into the biotechnology business. Children’s Hospi- tal in Boston started a for-profit genomics company, Claritas Genomics, which combines Children’s Hospital-developed genomics tests and bioinformatics with California-based Life Technologies’ genomic sequencing instruments.

Innovation Strategies

An innovation strategy is a product-development strategy that deserves discussion on its own. Innovation strategy requires research and development (R&D) and focuses on intro- ducing technologically advanced products or processes. The genomics company started by Children’s Hospital in Boston is an innovation strategy as well as a conglomerate- diversification strategy. The “R” of R&D involves both basic and applied research. Basic research focuses on discovering new things and processes previously unimagined; it is also very costly, with uncertain outcomes. Applied research takes existing knowledge and concentrates on commercializing it. The “D” of R&D is highly applied and focuses on improving existing products.

Concentration Strategies

Ryan McVay/Photodisc/Thinkstock

A hotel-style concierge desk in a hospital lobby is one market-development strategy being employed by HSOs.

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CHAPTER 1Section 1.4 What Is Strategy?

Figure 1.2 shows the basic types of innovation strategy, varying from short-term, relatively inexpensive, and low-risk in the bottom-right corner of the figure to long-term, requir- ing considerable investment, and high-risk in the top left. The more one moves toward the upper left, the more time and resources will be required to complete the project. The ideal situation for an HSO pursuing an innovation strategy is to have a balanced portfolio including projects ready without much investment in the near term, some requiring more investment and time ready in the medium term, and some more risky, long-term projects requiring more research and advanced development.

Figure 1.2: Degrees of innovation

Source: Burgelman, R. A., Christensen, C., & Wheelwright, S. C. (2008). Strategic management of technology and innovation. (5th ed.). McGraw Hill. Used by permission of the author.

The extent to which an organization’s strategy is innovative varies according to the changes made to the products and processes.

Unique radical

Platform or next generation

New core

process

Research and

Advanced Development

Next generation

process

Process Changes

P ro

d u

ct C

h an

g es

Single dept.

upgrade

Tuning and

incremental

New core

product

Next generation of core product

Addition to product family

Add-ons and enhancements

Enhancements, hybrids, and derivatives

Sustaining

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CHAPTER 1Section 1.4 What Is Strategy?

Few HSOs are involved in product development. You may find this strategy being used in teaching hospitals already involved in biomedical research activities. Children’s Hospital is merely commercializing research it is already doing. More often innovative product ideas originating from HSOs are sold or licensed to other companies for development, manufacturing, and distribution.

Generic Strategies

Michael Porter (1985) discovered in his research that a lack of a competitive advantage was the reason companies generated below-industry-average profits. He proposed that the way to obtain a competitive advantage was through one of three generic strategies, so called because they applied to any industry. Those generic strategies are differentiation, low-cost leadership, and focus.

Differentiation A differentiation strategy involves producing a product or service that is different from or better than those of other competitors. There are myriad ways of doing this, as seen in our earlier discussion on differentiation. The difficulty HSOs have in competing this way is that healthcare consumers must perceive your service as being different. Thus, you must convince consumers that the service is better than what other HSOs offer. An attraction of this strategy is that if your service is differentiated, you may be able to charge more for it because consumers are willing to pay more—such as concierge medicine now offered by some primary care clinics.

One special case of differentiation is a blue-ocean strategy, which is a way of competing that requires finding a market that is not being served at all—identifying a market where you are the only provider and have no competitors. Such a market space is called a “blue ocean” (Kim & Mauborgne, 2005). The name comes from an analogy in which a “red ocean” represents a bloody shark-feeding frenzy all going after some prey, meaning there is too much competition. A blue ocean, on the other hand, is free of any predator except you—no competition, no blood.

Having a strong brand is another form of differentiation but is singled out because the basis of the differentiation is reputation. Organizations with strong brands have strong reputations and are highly differentiated from each other. The reputation is built over time and represents the degree to which a business has met or exceeded its promises to customers. The more an organization delivers on or exceeds its promises, the stronger its reputation will be. In turn, more people will have confidence buying from the company.

Low-Cost Leadership A low-cost leadership strategy is completely invisible; neither competitors nor custom- ers know what it costs to run a business. An example of a retail company using this strategy is Walmart. Through subtle and not-so-subtle signals that are put out to other industry players, Walmart tells its competitors, “Don’t mess with me, because I have the lowest costs.”

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CHAPTER 1Section 1.5 Strategic Pathways

This strategy may not work well in healthcare because of the disjoint between costs and pricing. An HSO that is able to operate at a lower cost than its competitors does not auto- matically lower its prices to increase patient volume. Patients typically do not have access to pricing information. Plus, many patients do not directly pay for services because their health plan picks up the tab. Even when insured patients must pay some charges out of pocket, the amounts are based on a discounted price the HSO negotiated with the health plans, not the full price uninsured patients would be expected to pay.

Focus A specialization or focus strategy targets a very small market (often called a niche) and, in so doing, reduces greatly the number of competitors in the arena. For example, there is a growing market for international medical travel, spurred by increased demand for health- care services from aging baby boomers, coupled with rising costs in the United States.

A healthcare organization has a chance to dominate a niche if many other HSOs choose not to provide services to the small market. The label healthcare niche market has been given to groups such as women, baby boomers, ethnic groups, the affluent, the unin- sured, millennials, and men (Cirillo et al., 2008). However, this designation is misleading

because in many communities these groups represent a substantial con- sumer base.

People willing to travel long dis- tances to receive what they believe to be better or less expensive medical care are a better example of a niche market. Healthcare organizations such as Johns Hopkins in Baltimore are specializing in this niche market. InterMountain Healthcare in Salt Lake City has tapped into a niche market with its advanced cost and quality control training programs for healthcare leaders, managers, and patient care staff members. Other niche markets in healthcare include sleep diagnostic centers, correctional healthcare, trauma care services, and alternative medicine centers.

1.5 Strategic Pathways There are several different approaches an HSO can take when implementing its strategy. More than one approach may be used to achieve various strategic goals. In some situa- tions, it makes good business sense to engage in strategic alliances; in other situations, an acquisition or merger approach is the best choice. If the HSO intends to enter another industry, a diversification strategy is needed. A pathway taken by some HSOs is retrench- ment or divestiture. In this section, these approaches are described in greater detail.

American seniors enter a pharmacy in Progresso, Mexico. Many countries offer medical procedures, treatments, and medication for a lower price than in the United States; this type of international healthcare is one example of a niche market.

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CHAPTER 1Section 1.5 Strategic Pathways

Strategic Alliances

Strategic alliances are agreements between two organizations, ranging from simple con- tracts (minimal integration and collaboration) to joint ventures and minority ownership (heavy integration and collaboration), but where each organization remains separate. Fig- ure 1.3 shows various kinds of strategic alliances and where along the spectrum they lie. The following discussion elaborates on the figure beginning at the left-hand end; the right-hand end, mergers and acquisitions, will be discussed later in this section.

Figure 1.3: Continuum of strategic alliances

Source: Abraham, S. C. (2006). Strategic planning: A practical guide for competitive success. Miami, OH: Thomson South-Western. ©Emerald Group Publishing Limited.

The choices for strategic alliances range from simple outsourcing of one function to 100% acquisition of another organization.

Outsourcing and Simple Contracts Into this category fall simple purchase agreements for products or services, such as infor- mation technology (IT) vendors, that often spell out terms such as deliverables and pay- ments. Organizations need protection in case products delivered are faulty, services are unsatisfactory, or payment is late or not paid. Agreements take care of these eventualities.

Affiliations often fall into the category of outsourcing and simple contracts. For exam- ple, it is common for community health centers to contract with other providers for the provision of specific healthcare services such as dental care and mental health services. HSOs affiliated with accountable care organizations have contracts that spell out provider responsibilities and financial risk-sharing provisions. Like any business arrangement, even informal affiliations must be carefully spelled out in contracts. The often-quoted words of John D. Rockefeller (1874–1960) come to mind: A friendship founded on business is better than a business founded on friendship.

Contractual Increasing Integration and Collaboration

Collaborative

Traditional M&A

Contract Services

Licensing (Nonequity)

Shared Resources

and Competences (Nonequity)

Partial Acquisitions

(Noncontrolling <50%)

Joint Ventures

Partial Acquisitions (Controlling

>50%)

Outsourcing Organization AlliancesIncreasing Partner Commitment

100% Acquisitions

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Licensing Companies that own a patent or desirable trademark make extra money by licensing the use of it to other companies. In this way, they control the use of that asset, how much they are compensated, and the extent to which their brand is strengthened. Have you ever wondered why clothing and caps from your alma mater are so expensive? About half of the price goes toward the university itself as a licensing fee. HSOs involved in biomedical research often own patents on the products of their research. Physicians and other health- care professionals hold patents on equipment or supplies they have invented.

Licensing works both ways. Not only do owners of patents and trademarks benefit, but companies on the other end are happy to pay the licensing fees and royalties for using someone else’s intellectual property, because they are spared the years and expense of developing that product themselves. For example, many health insurance companies and HSOs pay a licensing fee to McKesson for use of its InterQual- criteria to evaluate the medical appropriateness of healthcare services.

Shared Resources and Competences Companies may share the cost of R&D to develop technologies that require large amounts of capital and risk. The partnership between Children’s Hospital in Boston and Life Tech- nologies is an example of shared R&D. Children’s Hospital is providing genomics tests and bioinformatics, and Life Technologies is providing genomic sequencing instruments. Joint R&D projects between private companies and teaching hospitals for the benefit of both is becoming increasingly common. Sharing resources is also common—some hospi- tals and nursing homes share equipment, personnel, or services.

Joint Ventures Forming a joint venture (JV) requires the creation of a new corporate entity jointly owned by the two organiza- tions. An apt analogy often used in the literature is that of two parents giving birth to a child. The JV is gov- erned by a detailed and encompass- ing agreement that specifies what each parent will contribute to the child, how much of the risk each parent incurs and the percentage of profit each is due, how long the agreement will endure, under what circumstances the agreement can be terminated, and how the remaining assets are distributed. Initial contri- butions take the form of capital, man- agement, technology and patents, facilities, and so on. Research has shown that JVs tend to be more successful when the management team comes from one parent—usually the dominant one—rather than both parents (Killing, 1983).

The creation of a new nursing home can sometimes be the result of a joint venture between a hospital and a corporation.

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CHAPTER 1Section 1.5 Strategic Pathways

The nursing home on the grounds of the Beverly Hospital in Beverly, Massachusetts was initially a joint venture of the hospital and the Hillhaven Corporation, a large operator of nursing homes in the 1980s. Joint ventures between for-profit and nonprofit HSOs are on the rise. When the board of trustees at the not-for-profit Greater Waterbury (Connecticut) Health Network sought a partner to improve Waterbury’s financial, operational, and clin- ical resources, it chose to partner with for-profit Vanguard Health Systems of Nashville, Tennessee (Barr, 2013).

Joint ventures in healthcare must be carefully structured so as not to run afoul of sev- eral legal and statutory requirements, including the Stark Law, the Anti-Kickback Statute (AKS), and the Gainsharing Civil Money Penalties (CMP) law. The Stark Law prohib- its physicians, or their immediate family members, who have a “financial relationship” (including investment/ownership interests) with an entity from referring patients to the entity for “designated health services” covered by the Medicare program, unless an excep- tion is available. The AKS prohibits hospitals from “the exchange (or offer to exchange), of anything of value, in an effort to induce (or reward) the referral of federal health care program business” (American Health Lawyers Association, 2011, para. 1). The CMP law prohibits hospitals and physicians from “any gainsharing arrangements that involve payments by or on behalf of a hospital to physicians with clinical care responsibilities, directly or indirectly, to induce a reduction or limitation of services to Medicare or Medic- aid patients” (Office of Inspector General, 1999, para. 24).

Acquisitions and Mergers

A changing economic landscape for HSOs, exacerbated by the most recent economic downturn, has accelerated their interest in acquisitions and mergers. An acquisition strat- egy is one in which an HSO buys another to take full control of it. It may purchase any- where from a majority 51% stake to an outright 100% ownership. In the Greater Waterbury Health Network–Vanguard joint venture, Vanguard owns 80% and the Network owns 20%. “Full control” means that the acquirer makes all subsequent decisions, and its board of directors and management survive intact; the board of directors and management of acquired HSOs do not. However, if the acquired HSO is doing well, it may make sense to retain its full management and simply invest in it so it can grow and do even better. Acquisitions are paid for with cash, a combination of cash and debt and stock, or entirely with stock. In any acquisition, the final price and method of payment is, of course, negoti- ated by both boards of directors.

The principal reason to acquire another HSO is because it fits with the overall strategy of the acquirer, but other reasons are also common, such as for financial gain or to pre- vent a competitor from doing so. Acquisitions can be risky, because the value an acquisi- tion was expected to add may not be realized. In many cases, this happens because the acquirer overpaid. Additionally, problems can arise if the cultures of the acquired HSO and the acquirer clash. Integrating organizations set themselves up for failure if they enter the acquisition phase with strongly conflicting cultural ideas (Hirschfeld & Moss, 2011). For example, an outpatient cancer center may operate under the belief that management should be free to make snap decisions, knowing adjustments will be made along the way. By contrast, the hospital partner’s culture may dictate that decisions should always be vetted through a hierarchical process.

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CHAPTER 1Section 1.5 Strategic Pathways

A merger strategy also combines two HSOs, but the combined entity makes joint deci- sions as some people from both companies—board, senior management, and operational management—remain after the merger. Often, the CEO is from one HSO and the presi- dent from the other. Mergers succeed only when the cultures of the two entities are similar and both parties feel that merging would be in their mutual interest. Frequently, public hospitals must obtain voter approval of mergers. In common usage, the term merger is loosely used to refer to an acquisition, which is a very different arrangement.

Diversification

A diversification strategy signals a move to enter another industry, which could be related to the industry it is in or unrelated. The term is often misused when companies call the broadening or extending of their product line “diversification.” There are two principal ways to enter another industry or market segment. The first approach is through inter- nal R&D, as when, for example, a new technology or product has application in another industry. A company that invented a flow meter to more accurately measure gas flow in an automobile was able to implement this strategy when it learned that this same flow meter could, in a much smaller design, be used to measure blood flow in a human being.

The second route to diversification is through acquisition, particularly in an industry in which no one in the HSO has any experience. The idea is to become an instant player in that industry and also minimize the risk by having managers and employees already experienced in that industry. The strategy works particularly well when a growth industry is targeted and all the company needs to grow and succeed is capital. Expecting growth in the home care sector of the healthcare industry, Aperture Health, Inc., a New Jersey- based healthcare company offering corporate health and wellness management programs, acquired two companies in that sector in 2012: Triad Therapeutics, a home care infusion therapy and nursing provider, and Doctors on Call, a home medical practices company in New York City (Aperture Health Inc., 2013).

Retrenchment and Divestiture

A retrenchment strategy is a conscious decision to become smaller. This could be a response to a declining industry or a declining level of funding such as what some public hospitals have had to do when state and local funds were slashed. In other situations, a healthcare system will divest itself of some assets by selling off a division or closing poorly perform- ing facilities. When revenues suddenly decline, HSOs have to trim expenses and payroll accordingly to fit their new reality. Selling off assets is also called a divestiture strategy.

Being acquired, or selling the business, is a special case of a divestiture strategy where the whole organization is divested—sold to another company or person. It is the opposite of an acquisition strategy. Are there circumstances when any HSO would actually want to do this? The answer is yes. Selling an HSO represents a change in ownership, but in most cases, the organization continues to exist. In some cases, however, the sold organization gets “folded into” the acquiring organization and for all intents and purposes disappears. The reasons for selling an HSO may include an owner wanting to cash out and retire (such as a physician selling his private practice) or receiving an offer that is simply too good to pass up. At the other end of the scale, an organization might be doing so poorly financially that the only strategy left is to sell it.

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CHAPTER 1Section 1.6 About Business Models

1.6 About Business Models Business models are different from strategies, but in some people’s eyes the distinction is fine. You can make up your own mind after reading this section. Earlier, we defined strategy as “how a company actually competes.” A business model describes the way in which a firm does what it does to deliver customer value (Abraham, 2006). For example, a hospital’s strategy could be concentration (both market and service development) and possibly acquisition. Its business model should answer some basic questions:

• How will it get people to come to the hospital for services? Will it attract patients by delivering high-quality services, offering low prices to insurance companies, training courteous staff, promoting wellness, etc.?

• How will it make money? Will it control costs by streamlining processes and removing wasteful steps, seeking volume discounts from suppliers, selling more wellness products, etc.?

• How will it grow? Will it produce growth by expanding services that can be effi- ciently served by existing facilities, acquiring physician practices, etc.?

Read Case Study: WebMD Innovative Business Model That Faltered for a detailed look at a unique business model.

Discussion Questions

1. What are the risks of an HSO forming a strategic alliance with a healthcare supplier such as a pharmaceutical or medical equipment company? Consider things like organizational cultures, legal and statutory requirements, and the primary mission of each entity.

2. What strategies might a hospital consider using against established competitors with good reputations?

3. Imagine a successful outpatient surgery center owned by three physicians whose wealth is derived entirely from the surgery center’s operations. The three physicians are nearing retirement. What strategy could this HSO pursue to provide income for the physicians in their retirement, while ensuring the surgery center would continue to be profitable?

4. Strategic alliances are often thought of as a way for an HSO to get help competing instead of going it alone. In what ways might one be better than the other?

5. A collaboration between HCA Healthcare and AirStrip Technologies in 2012 expanded the use of AirStrip’s mobile patient monitoring software in HCA facilities. In addition, HCA Healthcare made a financial investment in AirStrip. What business strategy is being used by HCA Healthcare in this collaboration? What business strategy is being used by AirStrip Tech- nologies in this collaboration? Do you think patient care will be positively affected by this collaboration or not?

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CHAPTER 1Section 1.6 About Business Models

Discussion Questions

1. What is the business model for a typical university? And for the university from which you are currently taking this course? Does such a business model have anything to do with strategy? Does the university’s profit or nonprofit status affect its business model?

2. If you are currently working for an HSO, try to articulate its business model. If you found this exercise difficult to do, why do you think it was difficult?

3. Web-based medical advice firms are a new entity in the HSO spectrum. Try to articulate how the business models of these firms differ from those of brick-and-mortar HSOs.

Case Study: WebMD Innovative Business Model That Faltered

A famous example of a for-profit company that entered the healthcare market by storm using a different business model is WebMD. Before WebMD came on the scene in 1999, web-based medicine was in its infancy. It was the strategy of WebMD to alter how the entire industry functions by serving as an Internet connectivity provider for the entire healthcare spectrum by “becoming the largest IT partner to physician offices, the largest provider of electronic transactions to the health- care industry, and the leading healthcare portal” (Tran, 2009, p. 3). The business model for achiev- ing this strategy focused on creating unique online user experiences for patients, physicians and other healthcare providers, and payers.

To quickly implement this plan, for much of 1999 and 2000, WebMD acquired small key com- panies, allowing it to rapidly integrate across various sectors. This strategy resulted in early suc- cesses for WebMD. It was able to lock in numerous U.S. health maintenance organizations and physician practices.

Competition from regional companies plus other factors stymied WebMD’s plans to create an over- arching e-medicine experience for all stakeholders. WebMD has changed into a business company with health information product lines and a few successful Internet portals that are not intercon- nected. David Francis, a Jeffries & Co. analyst, was quoted in a Businessweek article describing the company’s management team as “good at cutting costs and doing deals—but not at executing at the operational level. . . . All the pieces were there. They just needed capable people to put it together and make it work” (Tsao, 2004, para. 13–14).

Hawkins notes that “a business model may become a product in and of itself,” which is what happened with WebMD (2004, p. 71). When WebMD first started, its innovative business model attracted many customers. WebMD will likely always be remembered as the “spark” that ignited second-generation web-based medical advice firms such as HealthTap.com and EasyHealthMD .com. By integrating physicians into the consumer’s Web experience, these companies offer real- time teleconsultation or virtual consultation services.

A web-based medical advice company is a unique business model that connects patients and doctors in virtual consultations.

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HealthTap.com

EasyHealthMD.com

CHAPTER 1Section 1.7 Importance of Stakeholders

1.7 Importance of Stakeholders Stakeholders are “the individuals and groups who can affect, and are affected by, the stra- tegic outcomes achieved by and who have enforceable claims on a firm’s performance” (Hitt, Ireland, & Hoskisson, 2007, p. 21). Stated more simply, stakeholders are those entities to whom an HSO owes any duty or obligation. Several groups of people or companies can be defined as stakeholders, including consumers, employees, independent (not employed by the HSO) physicians, investors, creditors, third-party payers, host communities, and even the environment. While the role of each entity may differ in its involvement, each nonetheless has a stake in the HSO.

Consumers

Consumers are recipients of health- care services, for example, patients, residents, and clients. Consumers are a group with a significant stake in HSOs. All are concerned with cost and quality and have increasing uncertainty about access. Every HSO makes promises to its consumers, either explicit or implicit, that when they use a service, it will perform as expected and will not harm them. For most HSOs, consumers are more than just a source of revenue. HSOs strive to keep the promise for high- quality patient care. Healthcare con- sumers are represented collectively by various groups such as the Ameri- can Association of Retired Persons, the American Cancer Association, and the American Heart Association.

Employees

As they are the ones providing the healthcare services, it goes without saying that employ- ees are also vital HSO stakeholders. If the business fails, employees lose their jobs and put their families in jeopardy. HSOs vary greatly in how they treat their employees. At one end of the spectrum, employees are highly valued and sometimes are co-owners of the company. PT3608 is an example of an employee-owned physical therapy firm based in Williston, Vermont (PT3608, 2013). Organizations that highly value their employees invest in them, train them, and provide long-term benefits.

At the other end of the spectrum, HSO employees are treated as commodities or objects, hired and let go at will, even being replaced by part-timers or agency staff to “save” the cost of having real employees. Some organizations believe they owe no duty to employees other than simply employing them. With this attitude, employees are considered a “cost” and neither a resource nor a stakeholder.

Those who participate in the annual breast cancer walk sponsored by the American Cancer Society collectively represent the healthcare consumer.

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CHAPTER 1Section 1.7 Importance of Stakeholders

Physicians

For several decades, most physicians functioned independently from hospitals and simi- lar provider facilities. Physicians worked in the facilities to care for their patients, although most were not employees. In this arrangement, physicians function much like a consumer stakeholder—recipients of the services offered by the HSO—and also like an employee stakeholder—individuals owed a duty by the HSO.

Physicians’ expectations that they are able to continue to work independently may no longer be realistic. The rapidly changing healthcare environment is altering stakeholder relationships among all HSOs. The increasingly challenging economic conditions are affecting physicians in particular. Hospitals are employing physicians, known as “hospi- talists,” to care for patients. Physician groups are integrating or partnering with provider organizations to limit their exposure to economic risks. Whatever the role of physicians in the future, they will always remain key stakeholders in the strategic objectives of HSOs.

Investors

Publicly and privately held for-profit HSOs have investors. Stockholders, or sharehold- ers, are the stakeholders that first come to most people’s minds. Investors in privately held companies are not called stockholders or shareholders, but simply investors. Inves- tors have taken a risk by investing in the HSO and expect to be appropriately rewarded. For publicly traded HSOs, the rewards come in two forms: stock appreciation and divi- dends. It is conventional wisdom that unless companies provide such returns, investors will withdraw their money and invest elsewhere. Not-for-profit HSOs also have investors who purchase bonds and other debt instruments issued by the HSO. Do not forget tax- paying citizens, whose tax revenue is “invested” by the government in publicly owned, nonprofit HSOs such as school-based health clinics, county hospitals, and public health departments.

Creditors

Creditors are another form of stakeholder. These are banks, other financial institutions, or individuals who loan the HSO money. If loans are not repaid as agreed, the HSO may find it difficult to continue getting new loans when it needs capital and could damage its credit rating, thus raising the interest rate on future loans. Creditors also include anyone to whom the HSO owes money—a supplier that has sold equipment to the HSO for which payment has not yet been made or employee wages that have not been paid.

Third-Party Payers

Third-party payers are entities other than the patient (first party) or healthcare provider (second party) involved in the financing of personal healthcare services. Third-party pay- ers include Medicare, Medicaid, managed care organizations, indemnity insurers, and businesses that contract for healthcare services. Since the advent of Medicare and Medic- aid, federal and state governments have become a dominant stakeholder in the healthcare

Tom Schmucker/iStock/Thinkstock

Federal and state government has become a dominant stakeholder in the healthcare industry since the advent of Medicare and Medicaid.

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CHAPTER 1Section 1.7 Importance of Stakeholders

industry. Unlike other third-party pay- ers, governments also serve as regu- lators and providers through public hospitals, state and local health depart- ments, veterans’ health facilities, and other HSOs.

Managed care organizations may be owned by insurance companies just as indemnity plans are, or they may be owned by hospitals, physicians, or consumer cooperatives. Ownership by an HSO changes the stakeholder relationship—the third-party payer is no longer an external stakeholder; it is part of the organization.

Host Communities

Host communities, which are towns or cities where HSOs are located, are considered to have a stake in the organization as well. Stakeholders in host communities encompass many groups:

• people living or working in the community • businesses • schools • churches • volunteer groups • civic leaders • newspapers and other media

While some HSOs feel the most they owe to a host community is to provide employ- ment, other HSOs take a more active role in the community. Most hospitals have a mission statement that reflects a commitment to promoting health and well-being in the com- munity. It is particularly important for tax-exempt HSOs to engage host communities as stakeholders because of federal regulations requiring these HSOs perform a community health needs assessment every three years or be subjected to a fine. In addition, hospitals must report “what they are doing to address the needs identified in the needs assessment, describe any needs not being addressed and explain why they are not being addressed” (Dunn, 2011, para. 2).

Local and tribal health departments seeking accreditation by the Public Health Accredita- tion Board (PHAB) must collaborate with host communities by participating in or con- ducting a community health needs assessment similar to the requirements of the Patient Protection and Affordable Care Act. These health departments must also engage with the public health system and the community to identify and address public health problems,

Physicians

Investors

Creditors

Third-Party Payers

Tom Schmucker/iStock/Thinkstock

Federal and state government has become a dominant stakeholder in the healthcare industry since the advent of Medicare and Medicaid.

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CHAPTER 1Section 1.7 Importance of Stakeholders

promote the community’s understanding of and support for policies and strategies that will improve the public’s health, and conduct a comprehensive planning process result- ing in a tribal/state/community health improvement plan (Public Health Accreditation Board, 2011).

Environment

Lastly, but important nonetheless, is the role of the environment as a stakeholder for HSOs. What duty do healthcare organizations owe the environment? In the past, the answer to that question would be “very little.” For years, medical waste found its way into rivers and lakes. In the past, some employees were forced to work in hazardous environments without adequate protection. If not for regulations that protect the general and work- place environments, such practices might continue. Regulations are another way of say- ing, “Treat the environment as a stakeholder”; the public interest and the future of our planet is worth protecting and trumps the private interests of one company. To comply with regulations, HSOs have to dispose of medical waste in approved ways, give employ- ees protection from unhealthy fumes and medical byproducts, and meet numerous other environmental standards.

Recently, organizations are being encouraged to “reduce their carbon footprint,” that is, to minimize or cease emission of greenhouse gases (carbon dioxide equivalent) into the atmosphere. Although there is no law as yet in the area of being eco-friendly, many HSOs are “going green” because they believe in not wasting or degrading precious resources and also because it has become a value embraced by their employees and even their con- sumers. Thus, in many ways, the environment is becoming an important stakeholder.

Discussion Questions

1. Who are the stakeholders in your life—in other words, those people to whom you owe a duty or obligation? Which of them are important, and which have you never thought about until now?

2. Who are the stakeholders for a nursing home? Do you believe that the most important stakeholder—the consumer—is often ignored? Why might this be so? Which stakeholders are given the most attention? Why?

3. For-profit HSOs often come under fire for catering only to themselves and their stockhold- ers. Do they serve other stakeholders? If so, why aren’t they perceived as serving other stakeholders?

4. What duty does an HSO owe to the environment? Expand on the ideas found in the text.

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CHAPTER 1Summary & Resources

Summary & Resources

Chapter Summary

• Strategic management is a complex process fundamental to an organization’s ongoing success. It includes both strategic formulation (planning) and imple- mentation. Successful HSOs use feedback from their planning and operations to improve the decisions they make the next time around.

• Strategic thinking is a fundamental driver of good strategic management and decision making. Strategic thinking involves having as accurate a perception as possible of an organization’s internal and external environment. The extraordi- nary pace of change in healthcare is making the job of strategic thinking more difficult and urgent. Doing strategic formulation without strategic thinking leads to poor strategies and strategic decisions.

• Strategic formulation is the means of deciding what strategy the organization should pursue to be more successful in the future. Some organizations, especially small ones or those run by a founder or autocratic CEO, typically do not do strat- egy formulation. In the rapidly changing healthcare industry, making decisions without good data, analysis, and the inputs of those who will have to implement the strategy is foolhardy. Planning is a structured and proven process for choos- ing the best strategy to follow and for making good strategic decisions.

• Competition is a capitalist society’s way for consumers to tell producers what they need and want to buy. An HSO and its competitors comprise a large sector of the healthcare industry and serve markets composed of groups of consumers. Markets are often confused with industries, yet they are very different: The for- mer buy products and services, while the latter produce them.

• The outputs of strategic thinking, coupled with candid assessments of the orga- nization itself and the resources at its disposal, form the basis for arriving at stra- tegic issues. These are the most pressing issues facing an HSO at that time and what strategic alternatives (or alternative futures) should be considered before deciding on the strategies to pursue over the next three or so years. The logical framework of strategy formulation is the best way for an organization to select successful strategies to pursue.

• The competitive strategies that HSOs follow include concentration, innovation and technology, and generic strategies. Although similar on the surface, strate- gies differ from business models; a strategy is how an HSO actually competes, whereas a business model states how an HSO attracts consumers, how it expects to make money, and how it will grow and succeed. “Success” means doing well on a set of performance-related measures and is different for every company. Suc- cess criteria include profits, market share, shareholder value, net worth, develop- ing a competitive advantage through brand equity, and reputation.

• An organization owes some measure of duty to its stakeholders. These include consumers, employees, physicians, investors, creditors, third-party payers, host communities, and the environment. Ideally, an HSO should fulfill its duty to all its stakeholders.

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CHAPTER 1Summary & Resources

Web Resources http://www.healthforum.com The website for the American Hospital Association’s Health Forum Leadership Cen- ter: This is a source of information on leading healthcare organizations, including white papers, podcasts, and case studies on issues of strategic importance.

http://www.strategyplus.org The website for the Association for Strategic Planning: This site includes articles and reports on strategic management topics relevant to many industries, including healthcare.

Key Terms accountable care organization A health- care organization that provides services to a defined population of patients for which its reimbursement is tied to savings costs and ensuring quality of care.

acquisition strategy Involves buying another company to take full control of it (anywhere from a majority 51% stake to an outright 100% ownership).

applied research Takes something already discovered and patented and finds ways of commercializing it (part of the “R” in R&D).

basic research Focuses on discovering new things and processes unimagined before and is very costly, with uncertain outcomes (part of the “R” in R&D).

blue-ocean strategy A differentiation strategy that involves finding a market space that is not served at all, where the company is the only provider of a product or service and has no competitors; such a market space is called a blue ocean.

book value The value of an organization asset shown on its balance sheet (which might have been depreciated or amor- tized); this may differ from what the same asset might fetch if sold on the open mar- ket (market value).

brand The ways in which an organization distinguishes itself from others; this can include its name, terms, symbol, or design. A strong brand is an indication of a suc- cessful differentiation strategy.

brand equity The power of a brand to influence purchases and loyalty. It can increase, remain the same, or decline over time.

brand strength See brand equity.

business model The way in which an organization does what it does to deliver customer value—how it gets customers, how it will make money, and how it will grow.

charity care Services provided for which payment is never expected or for which the patient is never billed.

concentration strategy Involves some combination of producing an existing, improved, or new product or service for an existing, expanded, or new market. Includes an innovation strategy geared toward new-service development.

conglomerate-diversification strategy A seldom-used concentration strategy that involves producing a brand new product or service for a brand new market.

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http://www.healthforum.com

http://www.strategyplus.org

CHAPTER 1Summary & Resources

core competence A capability that gives an organization a strategic or competitive advantage over its competitors; it is simul- taneously valuable, rare, costly to imitate, and nonsubstitutable, and one that under- pins a company’s strategy.

differentiation strategy One of Michael Porter’s three generic strategies that involves producing a product different from or better than those of other competi- tors and, as a consequence, having a strong and distinctive brand, which enables com- panies to charge more for their products because, in the consumer’s mind, they are offering something no one else is offering.

diversification strategy A strategy to enter another industry or segment, which could be related or unrelated to a company’s current industry. Companies can do this through internal R&D or through acqui- sition of a company already in the new industry.

divestiture strategy A strategy to sell off a division, major assets, or the entirety of the firm.

focus strategy One of Michael Porter’s three generic strategies: targeting a very small market (often called a niche market) and, in so doing, avoiding competing with organizations that are not interested in serving such a small market.

generic strategies First introduced by Michael Porter in the early 1980s as ways for a company to achieve a competitive advantage and above-industry-average profits. They are differentiation, low-cost leadership, and focus, or niche, strategies.

gross patient service revenue (GPSR) The amount of money the organiza- tion would make if it were paid the total amount billed for services delivered.

healthcare services organization (HSO) Businesses whose purpose is to provide healthcare services directly to consumers (for example, hospitals, nursing homes, home health services, outpatient providers such as physician clinics, urgent care cen- ters, rehabilitative services, public health clinics, and the like).

industry A collection of firms that pro- vides similar products or services to the same customers.

innovation strategy A product- development strategy that requires research and development (R&D) and focuses on introducing advanced products or services.

internal analysis Knowing, analyzing, and understanding everything about the business itself, especially what makes it a strong competitor.

joint venture (JV) Requires the formation of a new corporate entity (referred to in the literature as a “child”) jointly owned by two companies (referred to as “the parents”). It is a kind of strategic alliance that enables the two parents to accom- plish more than just having an agreement between them.

low-cost leadership strategy One of Michael Porter’s three generic strategies, giving an organization the lowest costs in its industry.

market The collective name given to the buyers of the products or services pro- duced by an industry.

market-development strategy A concen- tration strategy that involves penetrating an existing market, expanding into related markets, or finding new markets.

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CHAPTER 1Summary & Resources

market share A firm’s annual sales as a percentage of the annual sales of its indus- try or segment (really “industry share” but universally known as “market share”).

market value The value that any organi- zation asset might fetch if sold on the open market; this value may differ from that car- ried on the organization’s financial books (book value).

merger strategy This strategy combines two organizations, but through making joint decisions. Mergers succeed only when the cultures of the two entities are similar and both parties feel that merg- ing would be in their mutual interest. A merger strategy is often used synony- mously with an acquisition strategy, which is very different.

model A way of codifying a complex activity in a way that is at once easy to explain, understand, and learn—and gives someone a road map as to how everything fits together.

net income after taxes (NIAT) On the income statement, the amount that is left after all allowable expenses (including depreciation and amortization, which are accounting artifacts and not real expenses) have been deducted (often also referred to as “the bottom line”). Income state- ments are typically produced quarterly or annually.

net patient service revenue (NPSR) The amount of money the organization actually collects after deducting charity care and insurance contractual adjustments.

niche market A small subset of a larger market that has particular needs and that large competitors avoid because it is too small to be worth their time to serve.

nonprofit organization Uses its excess revenues to achieve its strategic goals rather than distributing them as profit or dividends.

operating revenue Income earned by delivering patient care services.

Patient Protection and Affordable Care Act A U.S. federal statute signed into law by President Barack Obama on March 23, 2010. Together with the Health Care and Education Reconciliation Act, it represents the most significant government expansion and regulatory overhaul of the U.S. health- care system since the passage of Medicare and Medicaid in 1965.

product-development strategy A concen- tration strategy that involves continuing to produce existing products, improving them over time, or introducing new prod- ucts, all for the same market.

relative market share A calculation of the percentage of an HSO’s sales compared to its largest competitor or the combined sales of the three largest competitors.

retrenchment strategy A strategy reflect- ing a conscious decision to become a smaller competitor in the industry.

served market All buyers able and willing to purchase or use the healthcare service.

service-development strategy A concen- tration strategy that involves continuing to produce existing services, improving them over time, or introducing new services, all for the same market. See Product-development strategy.

shareholder value A computed value based on a company’s projected cash flows for the next 10 years, discounted to the present time using discounted-cash-flow (DCF) analysis and an appropriate dis- count rate, and subtracting from the result all current debt.

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CHAPTER 1Summary & Resources

stakeholders Individuals and groups that are affected by the strategic outcomes achieved by a business and who have enforceable claims on a firm’s perfor- mance; Groups of people to whom an HSO owes some form of duty.

strategic alliance Two organizations part- nering for their mutual benefit but retain- ing their distinct legal identity. Strategic alliances vary in their level of integration and commitment, ranging from simple contracts to joint ventures and owning minority stakes in other businesses.

strategic management Steering and man- aging an organization to be successful over time—not just for one year, but also year after year. Strategic management involves strategic thinking, strategy formulation, and strategy implementation.

strategic planning Often referred to as strategy formulation, this is a process by which a business develops a strategy to achieve certain purposes (what it considers “success”).

strategic thinking A continual activity that seeks to find a better strategy and business model, including a market space that is not currently served and has no competitors (blue ocean). This cannot be done without knowing and understand- ing what is changing in an organization’s external environment and what the future might hold.

strategy How a company actually competes.

strategy formulation Sometimes known as strategic planning, it involves conduct- ing internal analyses, determining key strategic issues, developing viable stra- tegic alternatives, and choosing the best strategy.

strategy implementation Involves opera- tional and budget planning and successful execution of the strategies to enable the organization to achieve its vision and meet its objectives.

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