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Choosing the Best Strategy

Learning Objectives

After reading this chapter, you should be able to:

• Select criteria for choosing strategies appropriate to an HSO and its purposes.

• Use the criteria for evaluating strategic alternatives to help select the best one.

• Compare the differences between company partial, functional, and operational objectives, and among objectives, goals, and strategies.

• Explain why contingency planning is necessary and how to devise meaningful triggers and contingencies.

• Discuss why the board of directors has to be kept informed and involved throughout the strategic decision-making process.

Chapter 7 Sergey Nivens/iStock/Thinkstock

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CHAPTER 7Section 7.1 Selection Criteria

This chapter explains how to choose the best strategy for the organization from a number of viable alternatives using carefully selected criteria and how to argue persuasively for its adoption (refer to Figure 1.1). It also shows how to arrive at the other strategic decisions and keep the board of directors involved through the process.

7.1 Selection Criteria An organization may have only a few courses of action open to it or a very large number of strategic alternatives. The goal is to pick strategies most likely to succeed. For instance, when you play the game “Rock, Paper, Scissors,” you have three strategies available. You

can choose to form your hand into a rock, a piece of paper, or a pair of scissors. Before making your choice, you consider some factors. What form did you choose in the last round of the game? What did your oppo- nent choose? Does your opponent’s body language offer any insight as to whether he or she will form rock, paper, or scissors? Does your body language change depending on your anticipated choice? These consider- ations are the criteria you use in mak- ing a choice.

In the “Rock, Paper, Scissors” game, winning may simply be the result of good luck. For HSOs choosing between strategic alternatives, the hope of good luck is not the best way

to select strategies. Organizations that systematically evaluate strategic alternatives and effectively implement the chosen strategies are the ones most likely to have “good luck.”

Choosing among alternatives becomes a little easier when each alternative is compared, one at a time, against a set of criteria. What kinds of selection criteria are appropriate? Because one of the conditions for creating a good strategy is that if implemented, it would lead to success for the HSO, the criteria to evaluate the strategic alternatives should together represent what “success” means to the organization. At times, the analysis is insufficient to decide an issue, and the decision may eventually turn on more subjective factors. Depending on the HSO and its particular situation, the criteria explored in this section are possible candidates that could be used to examine strategic alternatives given an organization’s current standing and future outlook.

OJO Images/SuperStock

HSOs that want to strategize effectively should not rely simply on luck but rather on careful planning and assessment.

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CHAPTER 7Section 7.1 Selection Criteria

Adherence to Mission

While many publicly traded companies outside of the healthcare industry use share- holder value as a primary criterion for choosing among alternative strategies, this is often not the top priority for HSOs. Whether the HSO is for profit or nonprofit, the delivery of healthcare services is usually patient centered and mission driven. Improving the health of the community and providing high-quality services are often goals found in an HSO’s mission statement.

When the HSO is affiliated with a religious organization, strategic priorities are influ- enced by a sense of calling to work for the common good. When selecting among various strategic alternatives, a religiously affiliated HSO would want to consider the impact on people’s health and the system’s ability to care for the poor and vulnerable.

The highly competitive nature of today’s healthcare market has resulted in the missions of nonprofit HSOs and the means used to pursue them becoming more closely aligned to those of for-profit HSOs (Reeves & Ford, 2004).

Revenue Growth

Revenue growth is one of the most common criteria. Without revenue growth, for example, a religously affiliated HSO would not be able to continue its mission of caring for the poor and vulnerable. A striking example of revenue growth is illustrated in Case Study: Carolinas HealthCare System.

Case Study: Carolinas HealthCare System

For years, Charlotte Memorial Hospital had been a charity care facility that “lost money every year because most of its patients couldn’t pay their bills” (Garloch & Alexander, 2012, para. 2). Today, Charlotte Memorial is part of Carolinas HealthCare System, which owns or manages about 30 affiliated hospitals in North and South Carolina, has nearly $7 billion in revenue, and is one of the largest public nonprofit health systems in the United States.

The transformation of Charlotte Memorial Hospital, a publicly owned facility, began in the early 1980s, when it became appar- ent the hospital could not continue to provide indigent care if it did not also attract paying patients. In 1983, its new CEO unveiled a plan to compete with newer facilities in the area by building a heart institute, space for physician offices, and an 11-story hos- pital tower to replace a 1940s wing. The CEO began to put the hospital in the black by improving collections from patients and insurers (Shinn, 2002). After this expansion, it continued to grow into a large health system that today directly employs more than

(continued)

© Images.com/Michael Aveto/Corbis

The Carolinas HealthCare Systems success story shows that a health system can provide quality indigent care and also achieve profitability.

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CHAPTER 7Section 7.1 Selection Criteria

Case Study: Carolinas HealthCare System (continued)

1,900 physicians and serves patients at hospitals and other care locations, including freestanding emergency departments, outpatient surgery centers, pharmacies, laboratories, imaging centers, and nursing homes.

While delivering on its mission to take care of all citizens with outstanding healthcare, Carolinas HealthCare System has also had tremendous revenue growth, so much so that in June 2011, Meck- lenburg county commissioners voted to stop paying Carolinas HealthCare $16 million a year to care for the uninsured, as it no longer needed taxpayers’ help (Garloch & Alexander, 2012).

Profitability should be used as a criterion for selecting strategies when an HSO has insuf- ficient working capital or inadequate or negative cash flow, when profits in recent years have been flat or negative, or when it is highly leveraged (significantly more debt than equity). Today, healthcare organizations are facing increasing financial risk, which requires strategic management to be more clearly linked to financial planning (Zuckerman, 2012). Weiss (2005) recommends that HSOs conduct a sound cost analysis, ideally hiring a con- sultant to assist in identifying the expenses associated with a particular strategy as well as the financial implications of various choices (for example, joint venture versus buy). Although profitability will always be a factor, noneconomic questions such as “How will this investment improve coordination of patient care?” are also important to consider.

For publicly traded HSOs, shareholder value is an important criterion, for choosing not only from among alternative strategies, but also from among alternative investments. It requires an HSO to have a model for computing shareholder value so that the computa- tion for each strategic alternative or investment uses common values of discount rates and common assumptions about the future environment. In this way, the results become comparable.

Riskiness

Organizations vary in their propensity to take risks. They are more inclined to take risks when the decisions have paid off for them in the past and when they have sufficient capi- tal to afford a few mistakes. But degree of risk or riskiness as a criterion is more than this. An HSO’s culture can, for example, be risk averse. In this situation, the organization will avoid risk even when the risk has favorable odds of success. Risk can be analyzed and measured, but few HSOs have the skills to perform such analyses. Instead, the leaders prefer to make a risky decision according to instinct, or assess risk by venturing an opin- ion or two (guessing), or even ignoring any underlying risk. One way in which risk can be discussed among a group of people who are not risk analysts is as follows: Because all alternatives except “status quo” involve doing something the organization has never done before, “risk” can be used as a subjective measure of the likelihood that an HSO can implement the strategy successfully. Some alternatives are sure to score higher or lower than others when risk is viewed this way.

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CHAPTER 7Section 7.1 Selection Criteria

Timing

There may be issues of timing to consider among the strategic alternatives in question. Some alternatives are sensitive to when they are implemented, such as accelerating intro- duction of a new service or entering a particular market. For example, in August 2013 the insurance company Wellpoint signed a contract with Univision, the Spanish-language media network, to be the exclusive sponsor of its popular health-related programming. This deal is intended to give Wellpoint an advantage over other insurers in connecting with Latinos to sign them up for coverage (Gold, 2013). If implementing an alternative now increases its likelihood of success as opposed to doing it later, this may be reason enough to choose it. Conversely, if doing it now reduces any advantage you might other- wise have, such as investing in a new medical building just as the economy turns down sharply, then that may be reason enough to reject the alternative. However, using this criterion typically requires more data.

Investment Requirements

Amount of investment required is a practical criterion. If a particular strategic alternative requires an amount of capital the HSO does not have or cannot secure, then it should not even be considered a bona fide alternative because it is not feasible. Of course, the organi- zation could borrow more money, but it must be careful not to exceed some value of debt- to-equity ratio required by creditors or increase its debt to the point where its cash flow cannot service the debt. Obtaining equity capital may be relatively easy for a public com- pany that has been performing well, but not so for a private company. In certain circum- stances, an HSO could go public and raise some equity capital; in many circumstances, this is not possible.

Some private HSOs turn to the venture capital market for funds. For instance, U.S. Renal Care, a network of 85 dialysis centers as well as home and specialty hospital dialysis programs, was started in 2000 with funding from private equity investors (Walsh, 2012). To support its expansion strategies, Heart to Heart Hospice, a provider of hospice care based in Plano, Texas, secured a minority investment from Summit Partners, a growth equity firm in Boston (Walsh, 2013).

An HSO could find a partner to share some of the risk and put up some of the capital required. But in this case, profits resulting from the strategy must also be shared. Finally, being acquired by the right organization could provide the capital needed to finance a strategy, but this step should be taken only in the best interests of the organiza- tion, not just as a means of raising capital. In its

most simplistic application, all other things being equal, it makes more sense to choose a strategy that requires less investment over another that requires more.

Alex Williamson/Ikon Images/Getty Images

Some private HSOs turn to the venture capital market for funding.

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CHAPTER 7Section 7.1 Selection Criteria

Even when an organization can come up with the investment required by a particular alternative, an appropriate criterion might be return on investment (ROI) (a profitability measure) and how soon the investment can be recouped; a breakeven point in months is desirable. Clearly, an alternative with a shorter breakeven point is more attractive to an organization with scarce resources, such as a physician group considering the addition of “in house” magnetic resonance imaging (MRI) diagnostic services. A higher ROI is more attractive when increased profit is a critical measure of performance. It may make sense to choose a strategy that requires a higher investment if that investment can be recouped quickly and yields a higher return.

Organizational Culture

An organization might choose an alternative that suits its existing organizational culture over one that requires a cultural change for the strategy to succeed. Ideally, an HSO’s existing culture does not constrain its choice of strategy. Just as “form follows function,” so also does “culture follow strategy.” Changing the culture to support the right strategy might be preferable to limiting an organization to a strategy that fits the existing culture. Imagine what might have occurred at Charlotte Memorial Hospital had the culture not changed to embrace the growth required to meet its mission of taking care of all citizens regard- less of their ability to pay.

Often, shifting the organizational cul- ture is necessary when new strategies are required. If this does not happen, “the traditional culture—the beliefs, the practices and ‘the way things are done around here’—will override the new direction and prevent innova- tion and positive change” (Browning, Torain, & Patterson, 2011, p. 12). If an organization is trying to change its strategy with the presumption that the culture will also change, it may find the strategy almost impossible to implement because the unchanged culture is impeding it. It is well known that chang- ing an organizational culture is exceedingly difficult and, for large organizations, takes a lot of time (recall the discussion in Chapter 2). If every alternative considered requires the culture to change, the alternative that matches the existing culture the most and would therefore require the least change should, perhaps, be chosen.

© Royalty-Free/Corbis/Fuse/Thinkstock

Organizational culture—which may involve attitudes regarding who socializes with whom both in and outside the workplace—is often extremely difficult to change, especially in large HSOs.

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CHAPTER 7Section 7.1 Selection Criteria

Characteristics of Successful Strategies

Beckham (2000) proposes seven key characteristics of effective strategy. These success characteristics can help HSOs choose among alternatives:

• Sustainability: Does it have lasting and greater long-term impact than other alternatives?

• Performance improvement: Will it result in significant improvement in key measures of performance?

• Quality: Is it a provably better strategy than those of competitors? • Direction: Does it advance the organization toward a defined goal? • Focus: Is it targeted and does it offer a reasonable choice for a particular course as

compared to other attractive alternatives? • Connection: Do its elements offer a high level of interdependence and synergy? • Importance: Is it significant or fundamental to the organization’s mission,

although it may not be essential to organizational success?

As you can see, there are many questions that an organization must consider when select- ing among strategic alternatives. Which alternative will most help the HSO maintain or increase its patient satisfaction lead over its competitors? Or give it the quality advantage it never had? Or help it become more innovative and technologically competitive? As more HSOs realize that new markets lie in foreign countries, developing a global presence could become a prime factor.

Clearly, some characteristics make sense only for some organizations in certain situations while others apply to almost all HSO situations. The success characteristics you ultimately use in your analysis must fit the organization you are analyzing. For example, to some organizations, profit is the primary indicator of success. Elsewhere, success may be mea- sured by the health improvements of the community, the percentage of services provided to indigent patients, or the reduction of hospital readmissions.

Many of the considerations discussed in this section do not fit the circumstances of public health entities. The process of strategy formulation in a county or city health department, for example, might involve considering the following factors when selecting among sev- eral strategic alternatives:

• Cost or return on investment • Availability of solutions • Impact of problem • Availability of resources (e.g., staff, time, money, equipment) to solve problem • Urgency of solving problem (swine flu or significant air pollution) • Size of problem (e.g., number of individuals affected) (National Association of

County and City Health Officials, n.d.)

Case Study: Kansas Tobacco Prevention Workgroup for Specific Populations illustrates how one group evaluated alternative strategies for addressing a public health concern.

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CHAPTER 7Section 7.1 Selection Criteria

Case Study: Kansas Tobacco Prevention Workgroup for Specific Populations

In 2007, the Kansas Department of Health and Environment hosted meetings of a workgroup formed for the purpose of identifying critical issues and developing a strategic plan for tobacco use prevention among subpopulations that experience the greatest health burden from tobacco use and exposure. This workgroup, entitled the Kansas Tobacco Prevention Workgroup for Specific Populations, included representatives from HSOs, schools, youth programs, churches, public health centers, and other community social agencies (Tobacco Prevention for Specific Populations, 2013a).

At the first meeting, the workgroup discussed the subpopulations to be the focus of its efforts and issues facing the health department in reducing tobacco use in these populations. A nominal group process (multi voting) was used to select the following critical issues:

• Collaboration/partnership • Funding • Marketing/counter marketing (media) • Data • Trust/building capacity/outreach/resource center • Population-specific interventions that can be integrated into other programs

(education) • Advocacy and policy development • Addressing systemic changes (silos) (Tobacco Prevention for Specific Populations,

2013b, p. 3)

At the second meeting of the workgroup, participants used the criteria below to select alternative strategies for reducing tobacco use in specific subpopulations:

• Urgency: Is this a priority issue that needs to be addressed in the next 1–3 years?

• Potential Impact: Is it likely that address- ing this critical issue will have a significant impact on one or more specific popula- tions? Do you have reason to believe you can be successful on this issue?

• Actionable/Feasible: Are there oppor- tunities for action to address the critical issue? Is there room to make meaningful improvement on the issue?

• Resources: Are resources (funds, staff, expertise) either readily available or likely to be obtained in order to address the critical issue? Are there resources through the state and community members to work on the issue? If not, can resources be acquired?

• Community Readiness: Is this a critical issue identified as important by the community? Are people in the community interested in the issue? Is there community momentum to move this initiative forward?

• Integration: Is there opportunity for collaboration? Is there opportunity to build on existing initiatives? Will this duplicate efforts? (Tobacco Prevention for Specific Popula- tions, 2013c, p. 11)

BELMONTE/BSIP/SuperStock

Public health initiatives by state and local groups are improving the health of communities throughout the United States.

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CHAPTER 7Section 7.2 Criteria Matrix

7.2 Criteria Matrix One method that has been developed as a tool for evaluating strategic alternatives is called the criteria matrix. It entails choosing five or six criteria most important to the organiza- tion and assigning a numerical rating as a means of identifying the best strategy. Another benefit of creating and using the criteria matrix is to use it as a worksheet in developing defensible and persuasive arguments for your preferred strategy.

Experience has shown that using five or six criteria to evaluate the strategies makes the most sense. This range works because using too few criteria fails to capture the complex- ity inherent in the strategies, and using too many runs the risk of introducing conflicting criteria, which dilutes the effect of each criterion on the final outcome.

The criteria to use are entirely up to your management team. “Playing” with several crite- ria can be a useful way to learn of the strategies’ sensitivity to various combinations of cri- teria. When necessary, managers should supplement this analysis with detailed forecasts and analyses. For example, to assess which strategy might yield the most revenue growth were each one implemented, the team should conduct a more detailed revenue forecast for each strategy over the planning horizon (3 to 5 years). Even though such projections are still estimates and based on assumptions, they require more reflection and thought than mere guesses.

Notice also that many of these selection criteria address the purpose for doing strategic formulation in the first place and what the organization perceives as success. It is fitting that criteria used to chart the future direction of the HSO be as important to an organiza- tion as its fundamental purposes and what it views as success.

The criteria matrix allows organizations to evaluate strategic alternatives against multiple criteria using a scoring system that enables the results to be added up at the end. Small HSOs may be faced with just a few or less complex strategic alternatives. In these situa- tions, a simple criteria matrix might work just fine. The criteria matrix used by the Kansas Tobacco Prevention Workgroup for Specific Populations to select among alternative strat- egies is illustrated in Table 7.1. The workgroup ranked each strategy according to criteria

Discussion Questions

1. Many candidates for possible strategy selection criteria were presented in this section. It makes sense that the criteria should be related to the HSO purposes or what “success” means to the organization. Which of the criteria discussed have little or nothing to do with purposes?

2. Why were the criteria in question 1 included in the list of possibilities? 3. Which of the criteria discussed would be most useful for a hospital in differentiating among

strategic alternatives? Which would be most useful for a physician clinic? For a publicly funded community health center?

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CHAPTER 7Section 7.2 Criteria Matrix

that had been established (see Case Study: Kansas Tobacco Prevention Workgroup for Specific Populations) using the following scale: High = 3 points, Medium = 2 points, Low = 1 point. The top three strategies with the highest points were identified and then discussed to be sure there was group consensus before moving forward with planning.

Table 7.1: Simplified strategy prioritization matrix

Criteria

Urgency Potential Impact

Actionable/ Feasible

Resources Community Readiness

Integration Total Points

Alternative A 3 2 3 1 3 2 14

Alternative B 1 2 3 2 2 3 13

Alternative C 2 3 3 2 3 3 18

Alternative D 3 2 2 1 3 2 13

Source: Tobacco Prevention for Specific Populations (2013d). Strategy Prioritization Matrix. Retrieved from www.healthykansans2010 .org/tobacco/meeting2.asp, p. 2.

An example of a matrix that might be used by a large, publicly traded HSO is illustrated in Table 7.2. The first step is to choose a set of criteria that makes sense for the HSO. These may include some of those criteria described in the previous section and perhaps others relevant to the organization and its present circumstances.

The next step is to assign a rating to each criterion on a 10-point scale. Some criteria are positively correlated and some negatively correlated. These are indicated with a (P) or (N) in the matrix. An example of a positively correlated criterion is revenues: An alterna- tive that might yield high revenue growth is good for the HSO, but low revenue growth is bad. The two go in the same direction so to speak (high growth = good, low growth = bad), so the criterion “revenue growth” is positively correlated. In such instances, the rat- ing would range from 0 to plus 10. A neutral alternative would be scored 0, whereas an alternative that would be strongly favorable to the HSO might be a 9 or a 10. An example of a negative correlation is “size of investment required”: An alternative requiring a lot of investment is “bad” for the HSO, but a small investment requirement is “good.” The two go in opposite directions (a lot = bad, little = good). For a negatively correlated alterna- tive, the rating would range from 0 to minus 10. Thus, an alternative that is not risky at all would get a 0 score, one that is moderately risky a score of perhaps minus 5, and an extremely risky one perhaps minus 7 to minus 10. Table 7.3 lists examples of positively or negatively correlated criteria.

The rating scores are subjective estimates; the absolute value of the rating is not as impor- tant as spacing them according to an estimate as to how close or far apart the alternatives are. It is the relative ratings that are critical. The alternatives are rated against each crite- rion independently of any other criterion. When all the ratings are done, the scores are

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CHAPTER 7Section 7.2 Criteria Matrix

added up to see which alternative has the higher (if evaluating two) or highest total score. Table 7.4 offers an example of how this might be done.

Table 7.2: Criteria matrix for evaluating alternative strategies in publicly traded HSOs

Criteria Alternative A Alternative B Alternative C

Revenue growth 8.0 8.0 9.0

Profitability 7.0 7.5 8.5

Shareholder value 8.0 7.0 8.0

Riskiness -8.5 -8.0 -8.5

Investment required -7.0 -9.0 -9.5

Change in culture required

-6.5 -8.0 -6.0

Totals 1.0 -2.5 1.5

Table 7.3: Examples of positively and negatively correlated criteria

Positively correlated Negatively correlated

Revenues or revenue growth Capital investment required

Contribution to shareholder value Change in culture required

Return on investment Time to break even

Adverse effect on competitors Overall riskiness

Strength of value proposition

Gaining or extending a competitive advantage

Increasing bargaining power

Advancing mission

Table 7.4: Criteria matrix revised from Table 7.2

Criteria Alternative A Alternative B Alternative C

Revenue growth 7** 8 9*

Profitability 7** 8 9*

Shareholder value 6** 7 9*

Riskiness -7 -8 -9

Investment required -7 -9** -8

Change in culture required

-7 -9** -6*

Totals -1.0 -3 4

* Reasons to select ** Reasons to reject

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CHAPTER 7Section 7.2 Criteria Matrix

In Table 7.2, the strategic alternative that receives the highest total is option C. However, option A’s total score is so close to C’s that it makes arguing for C being the best alterna- tive open to question. This is where other considerations come into play. If market share or profitability is par- ticularly important to the HSO (reve- nue growth), or if the HSO is strongly averse to changing its culture, then the analysis would suggest option C. But the table also shows that option C requires the most investment, and if the organization is unable to raise the needed capital, that could be the one reason to reject it.

To avoid a situation where there are two alternatives that achieve almost equal ratings, the choice of criteria and assigned ratings are revised until there is a clear winner by at least three points. While this appears to be “fixing” the result, the process is still in “analysis” mode, which means that managers are free to try different criteria and rat- ings until they are satisfied they have a defensible strategy. After all, defending and being comfortable with the choice of strategy is what this whole exercise is about. It is that ulti- mate defense before top management or the board of directors that will keep anyone from “fixing” the ratings to yield a preordained result. A preordained or poorly argued result can be spotted a mile away and will damage its proponent’s credibility. So while this analysis is being done, it is important to remember to choose only that alternative that can be supported persuasively; the scoring system will help in that regard. The criteria matrix and the associated process of selecting criteria and rating strategies against them is simply an opportunity to develop arguments to defend or “sell” the preferred choice to others.

The danger with using such a quantitative yet still subjective method to choose among strategic alternatives is that it invites criticism precisely because one person’s criteria and ratings may not match anyone else’s. The results are sensitive to the criteria chosen. Using shared or consensus ratings within a group is one way to get around this problem and to try out different combinations of criteria. The principal value of the criteria matrix, however, is to force planners to test their choice of alternatives against different criteria in case other people believe such criteria are important. In the case of disagreement, those who have gone through this exercise will have “done their homework” and will be able to discuss—and perhaps refute—other people’s points of view.

In comparing Tables 7.2 and 7.4, note that the latter uses only whole numbers; because the ratings are “educated guesses” in the absence of any data, estimating to one place of deci- mals belies a level of accuracy that is often not there. Arguments involved in the selection of a strategy consist of two parts: (1) reasons why the preferred strategy was chosen and

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When evaluating strategic alternatives, choose only the strategy that can be supported and defended persuasively before top management.

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CHAPTER 7Section 7.3 Determining Objectives

Discussion Questions

1. The section advises that one should use 5–6 criteria in a criteria matrix. Discuss arguments of your own concerning why using a smaller or larger number of criteria would or would not work.

2. Would using more criteria produce a different result? Would it inspire more or less confi- dence in the result?

3. Compare the rating scales used in the Table 7.1 matrix and in the Table 7.2 matrix. How would using a 3-point scale versus a 10-point affect the prioritization process?

4. Assume you have developed a good criteria matrix and are now working on a convincing argument for your winning strategy. But what the criteria matrix reveals, in your opinion, doesn’t make for a convincing argument. What do you do?

5. The overarching purpose of a criteria matrix is to choose a preferred “best” strategy and argue persuasively to others (perhaps even yourself) that it is the best one. Can you think of another method or process that would lead to the same result? Explain it.

(2) reasons why the other two were rejected. The best ratings in the table are highlighted in the winning strategy. Thus, in Table 7.4, if option A was “forming new partnerships,” option B was “developing new services,” and option C was “expanding nationally,” the argument would look like this:

The organization should expand nationally because doing so would gener- ate the most revenue growth and profitability, increase shareholder value the most, and require the least culture change. Forming new partnerships would generate the least revenue growth and profitability and increase shareholder value the least, while developing new products would require the most investment and culture change.

Here’s a final comment on strategy analysis using the criteria matrix. It could be that the strategy chosen best meets all the criteria and one of the other two strategies falls short of all the criteria. This means a couple of things: (a) the winning strategy is so much better than the others and the one that falls short of all the criteria is so much worse than the others that it reflects badly on how the strategy alternatives were selected in the first place (they are all supposed to be good, viable strategies), and (b) the third strategy is left with no reason to reject it, which also hurts the argument. In such a case, the criteria matrix should be reworked so that the winning strategy is still the one that would prevail but would not be better than the other two on all criteria.

7.3 Determining Objectives Now that strategies have been selected, the planning process enters the recommendations phase. Recommendations include setting organization-wide objectives, defining strategic intent, identifying key programs to achieve the objectives, and exploring triggers and con- tingencies if things do not go as planned. Creating or revising mission and vision state- ments is also part of this final phase if the organization’s existing statements are no longer valid, or if the organization has never had them before.

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CHAPTER 7Section 7.3 Determining Objectives

An objective is a quantitative target to be achieved within a specified time frame. Typi- cally, the most common objectives in HSOs fall into these categories:

• Better-quality care • Improved patient safety • Improved capacity • Secure financial future • Better management of human resources • Improved customer service

It may seem odd to some that set- ting objectives comes after choosing a strategy. They may find it more logical to first set objectives and then choose a strategy to achieve them. Ideally, they should be set together, that is, iteratively until they fit with each other. But that is hard to do. Deciding on a strategy first makes sense for three reasons. First, it fol- lows naturally from identifying the organization’s key strategic issues, which in turn follow logically from the situation-analysis phase. Second, the selection of strategic alternatives creates a roadmap or direction for the HSO. Then, attention can be turned to deciding how far and how fast to go along that road (i.e., objectives).

Last, deciding on the strategy first allows many criteria to be used, enriching the assess- ment and ultimately the choice of strategy.

In addition, there are two problems with setting organization-wide objectives first. Where does the objective—the quantitative target—come from? Other than the case where the current strategy is being continued, setting an objective first lacks a context. For example, to meet a 20% revenue growth objective in 2 years may be possible by expanding into other states, but not by investing more in human resource development. Yet the latter may be the better strategy in the long run. Wouldn’t it make more sense to ask which of the two was capable of fulfilling the organization’s mission over the next several years?

The second problem with setting objectives first is their influence on strategy choices. For example, what if 20% revenue growth is the sole criterion for picking a strategy? How likely is the organization to consider any strategies that might not advance this objective? Wouldn’t it make more sense to use revenue growth in this instance as one of several important criteria? Would one be as content to achieve only the revenue-growth objective if the organization were also scoring low in quality and patient satisfaction results?

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Ideally, objectives and strategies should be set together, but when this is difficult to do, it makes sense to choose strategies first.

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CHAPTER 7Section 7.3 Determining Objectives

Some HSOs first set objectives and then evaluate strategic alternatives. One example is the 2011 winner of the Baldrige National Quality Award in the healthcare division, Schneck Medical Center, Seymour, Indiana. This hospital formulates strategies every 3 years. From November to February, senior leaders and the board of trustees do a com- prehensive assessment of internal and external factors to arrive at the strategic direc- tion. The next 2 to 3 months are spent developing strategic objectives and alternatives. The potential objectives are identified first and then strategic alternatives are selected to achieve the objectives. The impact of the alternatives and feasibility are evaluated before final decisions are made (Schneck Medical Center, 2011).

In the end, whichever one is done first—the strategy or the objectives—they must both match and be consistent with one another. The strategy determines how the HSO will compete and where it is going, while the objectives determine what the organization can achieve given its resources, capabilities, and aspirations. Great care must be taken to dis- tinguish objectives from strategies. For example, executives often talk of “high growth,” “moderate growth,” and “low growth” strategies. Clearly, these growth “strategies” are really objectives reflecting a high, medium, or low increase in revenues. The full range of possible business strategies was covered in Chapter 3.

Establishing Organization-Wide Objectives

While the model presented in this section advocates setting objectives after deciding on a preferred strategic alternative, the two must be so well matched that an observer would imagine that they were done together. It is impossible to evaluate or judge a strategy without knowing what the objectives are, and likewise impossible to judge whether the objectives make sense without knowing how they are to be achieved (the strategy) (Collis & Rukstad, 2008).

Consider this example: A hospital decides to pursue an accelerated new service-development strategy and, at the same time, change its fairly conservative culture into an innovative one that also values quality. Is this a good strategy? It is impossible to tell unless you also know what the hospital is trying to achieve—that is, know its objectives. If you were now told that in 3 years’ time the hospital expected outpatient volume to double and profits to increase by 20% and that it had the resources to carry out this preferred strategy, one now has a basis for either criticizing the strategy or believing that it will work (or even criticizing the objectives). So a strategy without objectives is meaningless.

Consider a second example: A state health department wants to increase by 20% the use of community-based residential care facilities by seniors on Medicaid as an alternative to nursing home care. This objective is to be achieved in 2 years. Is this is a good objec- tive? Again, it is impossible to tell unless you know how the health department intends to achieve it, which means knowing its strategy and programs. Merely trying to increase seniors’ use of community-based residential care, without a sufficient number of facilities being available and without providing adequate reimbursement, is likely to be insuffi- cient. It will take a well-thought-out strategy to give an observer confidence that the objec- tive could and would be achieved. Again, objectives without a strategy are meaningless.

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CHAPTER 7Section 7.3 Determining Objectives

The objective set by the Kansas Tobacco Prevention Workgroup was the following: By June 30, 2009, a minimum of three population-specific interventions will be disseminated statewide to at least 75 organizations reaching specific populations. The strategies selected by this workgroup were expected to achieve this objective.

Setting measurable, organization-wide objectives is a three-step process. First, a small number of high-priority objectives are selected. Next, annual expectations are defined for these objectives, and, lastly, objectives are matched up with the preferred strategy.

Limiting the Choices Decide on a small number of measures critical to firm performance. These might typi- cally include revenues, patient volumes, quality measures, and the like. There is no rule as to how many objectives an organization should have. But the more it has, the more difficult it becomes to achieve them all and the more likely it is that some objectives will conflict with others; that is, achieving one will result in not achieving another. About three to four organization-wide objectives is typical.

Remember from Chapter 6 that some HSOs use the Five Pillars in the Studer Model as a grouping for strategic alternatives (Studer, 2004). Often these HSOs also identify strate- gic objectives for each pillar. Schneck Medical Center has four pillars of excellence: quality care, customer ser- vice, fiscal and operations, and human resources (Schneck Medical Center, 2011).

Do not include cost reduction objectives as one objective, because any efforts to reduce costs will show up in improved profit; cost reduction objectives are important only at an operational and not a strategic level. Similarly, do not include operational or pro- grammatic objectives, such as number of new clients for a particular service, percent- age of surgical patients developing complications, or average wait time in the emergency department. While these measures are important, they should not be included in the set of organization-wide strategic objectives.

Examples of measures and objectives used by a hospital in the northeastern United States in four strategic categories are found in Table 7.5 (Spath, 2005). Note how the hospital leaders clearly explain what is being evaluated in the measure definition.

© orcea david/iStock/Thinkstock

Cost reduction should not be one of your strategic objectives; any effort to reduce cost will show up in improved profit.

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CHAPTER 7Section 7.3 Determining Objectives

Table 7.5: Measures and objectives for four strategic categories in a hospital

Strategic category

Measure Measure definition Strategic objective

Quality Patient restraints The extent to which patients placed in restraints (any type) have certain elements required by Medicare documents in their records

100%

Customer service Pain management

The extent to which staff members assess, treat, and educate patients about pain

Two or more standard deviations above the mean for other hospitals in the nation

Financial Days cash on hand

The number of days the organization could pay its cash operations and expenses if none of the accounts receivable were collected

72 days

Operational Salaries and benefits as a percentage of net revenue

The cost of salaries, wages, fringe benefits, and contract labor as a percentage of net revenue

48%

Source: Adapted from Spath, P. (2005). Leading your healthcare organization to excellence: A guide to using the Baldrige criteria. Chicago, IL: ACHE Health Administration Press, pp. 129–130.

Establishing Annual Objectives Decide on annual values for these critical measures for the next 3 years. This is difficult to do well. Theory tells us that objectives, to be effective, should be set at a “challeng-

ing” level; set too high, they demotivate because people consider them impossible to achieve, and set too low, they also demotivate because they are too easily achieved. How does an HSO find that perfect level? The following five-step process may help.

First, extrapolate from historical data to estab- lish initial values for each objective for the next 3 years. This is easier to do when you have at least 5 years of historical data available. Second, make a list of external and internal forces or changes that might act to decrease these beginning values over time, such as intensifying competition, scar- city of borrowed funds, a conservative culture, or decreased Medicaid or Medicare reimbursement. For each item, indicate, however subjectively, the strength of the negative effect on the objec- tive (high, medium, or low). Third, make a list of external and internal forces or changes that might act to increase these beginning values over time, such as a new strategy, a new CEO, a change to a more quality-focused culture, new efficiency

© Mika/Comet/Corbis

Determining objectives is like setting a pole-vaulting bar; set it too high, and the objectives will be considered impossible to achieve. Too low, and they will not be challenging. In both cases, the individual will not be motivated.

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CHAPTER 7Section 7.3 Determining Objectives

initiatives, strategic alliances, or joint ventures. For each item, indicate, however subjec- tively, the strength of the positive effect on the objective (high, medium, or low). Fourth, compare the two lists and decide, for each objective, whether the initial value deserves to be increased or decreased and by how much, depending on the extent to which the posi- tive effects outweigh the negative effects or vice versa. In this way, create a “first cut” of each objective for each of the next 3 years.

Finally, get feedback from those who are going to be held accountable for achieving the objectives regarding whether the “first-cut” objectives are challenging yet achievable in the circumstances. In fact, get these people involved in the other steps too. For some HSOs, deciding on strategic objectives cannot be done unless the whole range of opera- tional objectives has been created, thought through, and approved, to make sure that the resources to achieve them are available and that they are feasible to achieve in the time frame specified. When operational objectives have been well designed, achieving them should result in automatically achieving the organization-wide objectives.

Matching Objectives to Strategy Check that the objectives match the preferred strategy. The preferred strategy and the set of objectives must be consistent with each other. For example, if the strategy decided upon is aggressive, the objectives set should also be aggressive. If the strategy is a turnaround, the objectives should reflect this unusual state, showing first stabilization at a lower level followed by growth consistent with the new strategy. If the strategy is designed to main- tain market position in a highly competitive, mature market, the objectives should not show high growth but rather reflect current conditions to a high degree. If the strategy requires a period of heavy investment before it pays off, the objectives should reflect that reality. Remember, the objectives indicate what the organization considers to be successful performance over time given the changing realities of the industry, the marketplace, and the HSO’s own strategies, resources, and commitments. Thus, not achieving these objec- tives means less-than-successful performance, while meeting or exceeding them indicates intended or superlative performance in the circumstances.

Other Types of Objectives

The preceding discussion has been about setting organization-wide objectives. There are also other types of limited objectives. Partial objectives cover only part of some activ- ity, like Medicare revenue versus total revenue. Functional objectives pertain only to a particular function, like increasing the number of patients in the hospital’s cardiopulmo- nary rehabilitation program. Operational objectives are either subsumed by higher-order objectives (like reducing costs) or are cross-functional, for example, security or systems or plant maintenance, none of which comes under any “function” (see Table 7.6). All of these other types of objectives will show up during implementation of a strategy. The value of understanding the differences is that at the strategic level, we need organization-wide objectives, not functional or operational objectives.

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CHAPTER 7Section 7.3 Determining Objectives

Table 7.6: Partial, functional, and operational objectives

Type of objective Objective Explanation

Partial Increase private insurance revenue by 10% per year

Increase volume in new services introduced during the past 3 years to 10% of volume

Does not address all revenue

Does not address volume from existing services

Functional Double the number of clinic locations Concerns only marketing

Operational Redesign orthopedic services to reduce purchasing costs by 5% per year

Reduce costs by 12% per year

Decrease number of patients developing urinary tract infections

Concerns only orthopedic services

The higher-order objective of increased net revenue takes this into account

This is an operational objective for the medical staff and nursing

Objectives vs. Goals

In many HSOs, what we now under- stand to be an objective is often referred to as a goal (and vice versa). To underscore the difference as used here, a goal is defined as a qualitative end state that an organization tries to achieve, for example, “to become more patient-centered.” Note that progress cannot be measured, and there is no specified time frame.

Why, then, do HSOs have goals? Because goals are intended to inspire. They should sound stirring to employ- ees and to external constituents. The following are some examples of goals:

• Become more innovative • Listen to the voice of the

consumer • Improve the health of the

community • Provide safer healthcare services • Be there for our patients

© Mitsu Yasukawa/Star Ledger/Corbis News/Corbis

This medical simulator at Newark Beth Israel Hospital is used by doctors and nurses to help them better understand the challenges faced by patients with heart conditions. Providing employees with innovative training technology is a goal that many HSOs strive to achieve.

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CHAPTER 7Section 7.3 Determining Objectives

• Grow our operations • Develop a national presence • Become more efficient • Become lean and mean • Streamline our operations

At the same time, precisely because they are not amenable to measurement, goals let peo- ple off the hook. There is no incentive to follow through. It has been said that “you can’t improve what you can’t measure,” and there is much truth in that. Objectives are written in such a fashion that organizational members will be able to answer the question “Will we know it when we see it or when it happens?”

Organizational consultants and authors Beebe, Mottet, and Roach use four criteria for objectives (2003). First, accomplishment of the objective must be observable; we should be able to see the results. Second, objectives must be measurable; that is, some objective metric must yield useful data indicating that an objective has been met. Third, objectives must be specific; a clearly written objective includes precise guidelines for describing the nature of the objective and the strategies and tactics required to accomplish it. Finally, objectives must be feasible and attainable. Organizations must develop objectives based on a realistic understanding of both internal and external barriers to accomplishment.

Discussion Questions

1. Both in their public statements and in the way they are managed, HSOs make extensive use of goals and objectives. Assuming that they are defined as they are in this section, do you think that an HSO could be managed using just goals? Why or why not?

2. Imagine an organization whose managers collectively set objectives at a very conservative level, knowing full well the objectives would be exceeded and all of them would get hefty bonuses as a result. How could this situation be avoided?

3. Is it possible for organization-wide objectives to be set last, in effect adding up all the partial and functional objectives? If it is, might that be better or worse than setting them first?

4. Reward and incentive systems in some HSOs are attached to attaining or exceeding certain objectives. But little is said or publicized about what happens when such objectives are not achieved. What kinds of penalties would you suggest for not achieving organization-wide objectives and functional objectives? How would you gain everyone’s agreement in the first place for a system of penalties as well as bonuses and other rewards?

5. If it didn’t already exist in an HSO, would developing a system for penalizing failure to meet organization-wide objectives be worthwhile?

6. Recall an organization you were part of (it need not be an HSO). Did you have goals and objectives? What were they? Were they taken seriously?

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CHAPTER 7Section 7.4 Contingency Planning

7.4 Contingency Planning Murphy’s Law states, “If anything can go wrong, it will.” An extension of this axiom goes like this: “It always seems to happen at the worst possible time.” During strategy formula- tion, it is a good idea to contemplate what could potentially go wrong in the future. This potential setback is termed a trigger. What the HSO would do differently were the trigger to happen is referred to as a contingency. We therefore talk about “trigger–contingency pairs,” typically one or two that pertain to next year—the short term—and one or two that could occur 3 years from now—the long term.

It is effective to express a trigger–contingency pair in the form of a three-part sentence. The three parts include the following:

• The external cause of the trigger: “If the state lowers Medicaid reimbursement rates, . . .”

• The quantitative trigger: “. . . causing revenues to lag projections by 10%, . . .” • The contingency: “. . . then the organization should increase advertising to

patients with private insurance.”

When you string the three parts together, you get a sentence that looks like this: “If the state lowers Medicaid reimbursement rates, causing revenues to lag projections by 10%, then the organization should increase advertising to patients with private insurance.” You will find that this simple sentence meets all criteria for creating a good trigger– contingency pair.

In reality, organizations may have as many as 20 triggers and contingencies “active” at any time, assuming they do contingency planning, which essentially involves outlining trigger–contingency pairs. The planning horizon, however, can vary considerably accord- ing to the size of the organization and the industry. For example, a company like Boeing views the next several years as “short term,” about 10–15 years as “medium term,” and 20–30 years as “long term.” For most HSOs, 3 years is the standard for long term because of the rapid pace of change.

Triggers

Triggers should be external, specific, and quantitative. Absent these three qualifiers, the organization will not know when to invoke the contingency plan. It is no use saying, for example, “If profits decline,” or “When things get tough.” Decline how much? Get how tough? Even when trying to address phenomena that cannot be measured—such as a new competitor in your service area, or the effect of healthcare reform legislation—try to gauge their effect on achieving your objectives. For example, if the unknown phenomena were to cause your patient volumes to decline, would you do something differently if your revenue fell below target projections by 10%, 15%, or 20%? In this way, you will monitor something you constantly measure and will then enact the contingency plan at just the right moment.

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CHAPTER 7Section 7.4 Contingency Planning

Triggers also come from assumptions you make about the future that are “soft”—that is, about which you lack confidence and that are external to the organization. For example, if you are engaged in strategy formulation and your HSO’s profit is sensitive to the cost of pharmaceuticals, you might not know what is going to happen to these costs next year. You may have tried to obtain information from various economic forecasts on this vari- able but, frustratingly, all of them differed in their predictions. So here is something you can do. Simply presume that pharmaceutical costs are not going up next year (if market indicators make that at least plausible), and base your planning on that. However, because the assumption is “soft,” create a trigger that admits the possibility that costs could go up: “If the cost of pharmaceuticals goes up by more than X percentage points, then . . .” the contingency plan takes effect.

Triggers can also emerge from the timing of various imminent occurrences. For example, if state legislators are considering a new tax on alcohol to expand public health services, you may be unsure if this would take place next year or 2 to 3 years from now. So create your plans with your best assumption in mind—for example, no alcohol tax increase will be enacted during the period of the planning horizon. However, because the assump- tion is “soft,” create a trigger, too, that specifies, “If alcohol tax increase legislation were enacted within the next 2 years, then . . .” the paired contingency will be enacted. Notice that this trigger is quantitative. You can tell exactly when it happens and can therefore invoke the contingency plan. Similarly, you may want to do something differently if two competitors merge or if joint venture restrictions between physicians and hospitals are strengthened or lifted.

For HSOs focused on increasing volume or market share, it is tempting and understand- able to create triggers having to do with not meeting revenue objectives. To do this once is perfectly fine, but to have such a trigger every year gives the impression of obsessive focus in one area. Management’s role is directing and coordinating the many aspects of an organization to work together seamlessly to create value, and indeed things could go wrong in many areas, not just in failing to make a revenue objective. A better approach is to make a list of all the possible things that could go wrong or where your assumptions are soft, and choose the most likely of them as your triggers. Try to choose a different trig- ger for the long term from what is chosen for the short term. A useful training exercise is to create one trigger–contingency pair based on what might cause a volume shortfall and one a net revenue shortfall, stating one in the short term and the other in the long term, just to practice creating realistic trigger–contingency pairs.

Contingencies

Contingencies are precursors to contingency plans. They are a response to a particular trigger, what an organization should do differently if that trigger occurred. Later, when the strategic plan has been prepared for operational implementation, the contingency should be translated into a contingency plan complete with details as to who is respon- sible for it, its budget and schedule, and who must keep it relevant as conditions change.

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CHAPTER 7Section 7.4 Contingency Planning

Good contingencies should follow three guidelines:

• Do not renege on the adopted “best” strategy. For example, suppose Zoom- Care (a chain of healthcare clinics described in Chapter 6) chooses a strategy involving market expansion, but there is reason to believe it would be difficult to implement and pull off. If patient volume were to drop more than 10% from target projections at any time, it should not set as a contingency “Cancel the market-expansion strategy and implement a differentiation strategy.” If one does that, one is in effect saying that the strategic alternative chosen was not a good choice, and its proponents will instantly lose credibility. Besides, HSOs cannot—and should not—be in the habit of changing their strategies at the first sign of adversity. Strategies typically take anywhere from 2 to 5 years to imple- ment, and the organization must give the chosen strategy a chance to succeed by not changing it until there is absolute certainty it is not working. For any new or modified strategy being implemented that does not seem to be working, it is advisable always to suspect first the execution of the strategy, not the strategy itself. That way, the contingency should focus on operational changes that could be made to enable the strategy to succeed, not changing the strategy itself. The following are examples of possible operational changes:

○ Change the ad campaign or the advertising agency. ○ Replace the VP of Marketing (or any senior manager). ○ Do additional and specific market research. ○ Broaden the proposed geographic region for expansion. ○ Partner with retail pharmacies to increase consumer awareness. ○ Seek joint ventures.

• Do not make something that the HSO is already doing the contingency. Think about it. What the HSO has been doing up to the time the trigger is invoked is what got it into trouble in the first place. If patient volumes are not meeting expectations, do not set as a contingency “Continue advertising” or “Do more community outreach.” The HSO is already doing those things, and, clearly, patient volumes are still down. So think of something it can do differently, that is, an adjustment to its operations or execution, one that can be implemented quickly, say, in a couple of months.

• Make the contingency a solution to the problem implied in the trigger. If inad- equate patient volumes are the problem, the contingency should be directed toward increasing volume, not profits.

Because contingencies are in fact back-up plans, they have to be spelled out in great detail. Plus, those responsible for developing them and carrying them out must know who they are and what they must do. Those details are added during the operational phase prior to implementation. Organizations that go this extra mile of contingency plan- ning will reap rewards in three ways. First, they will be better prepared for specific uncer- tainties than HSOs with no triggers and contingencies, especially if they work to adjust the contingencies over time as conditions change to keep them current and workable. Second, they will become more adept at anticipating what might go wrong and come up with better triggers and contingencies over time. Third, they will appreciate the need to be alert to key changes in the environment and their organization and, over time, create a more flexible culture.

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CHAPTER 7Section 7.5 Keeping the Board of Directors Involved

Discussion Questions

1. If “value” implies benefits accruing for a certain level of costs, try to articulate the true value of contingency planning to an organization.

2. Contingency planning is needed precisely because certain assumptions about the chang- ing environment might be “soft” and uncertain. Yet, because of changing conditions both inside and outside the HSO, contingency plans—both triggers and contingencies—rapidly go out of date. How often should an organization review its contingency planning and keep things current?

3. Triggers assume that progress toward objectives is measured constantly and that actual per- formance can be compared to plan performance, say, every month. In your opinion, is this true of most HSOs?

4. Typically, net revenues are computed quarterly at most and are done so using accounting principles. To the extent you agree with this, should net revenues ever be used as a trig- ger? Discuss.

7.5 Keeping the Board of Directors Involved Strategy formulation is a critical part of strategic management and singularly respon- sible for directing or keeping the organization on the right path. In HSOs that do strategy planning, a top management team, led by the CEO and ideally including key operational managers, is responsible for doing the planning and implementing the decisions made during the process.

At the top of the organization is a board of directors with fiduciary responsibility for the HSO. Part of this responsibility involves policy decisions and development of a strategic plan that supports the organization’s mission and vision (Harrison, 2010). The Blue Rib- bon Panel on Governance Practices in an Era of Health Care Transformation, sponsored by the American Hospital Association (AHA) Center for Healthcare Governance (2012), identified several board practices critical to the future success of healthcare organizations. Several of these practices relate to board involvement in strategy formulation:

• Ensure development of patient and family engagement strategies. • Actively oversee physician alignment/integration, engagement and leadership

development strategies. • Use results of community health needs assessment to set strategy.

So what is the role of the board in planning and decision making? The role and level of involvement ranges, unfortunately, from almost nothing at one end of the scale to taking over completely at the other, and varies from organization to organization.

A survey of governance at rural hospitals conducted by the South Carolina Rural Health Research Center (2010) found that fewer than half of the 304 respondents strongly agreed that their boards understood and effectively used strategy formulation for their hospitals. The training of board members in strategic management was considered a high priority by CEOs and board members themselves.

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CHAPTER 7Section 7.5 Keeping the Board of Directors Involved

There are two scenarios where board involvement is nonexistent or where it “rubber-stamps” execu- tive decisions. In the first, there is a high degree of trust between the board and the CEO and top management. In the second, the board members have been handpicked by the CEO and agree with all his or her decisions. In many such cases, the CEO is also the chairperson of the board, making the relationship even cozier. While some organiza- tions are fortunate enough to enjoy mutual trust, nothing is wrong with the latter technically or legally. Whether it is “right” is a matter of opinion.

At the other end of the scale, the board is very actively involved in the planning process. At Schneck Medical Center, a 93-bed nonprofit hos- pital providing primary and specialized services to the residents of Jackson County, Indiana, the senior leaders and board of trustees are jointly involved in completing a comprehensive analysis of key factors, developing strategic objectives, and selecting among strategic alternatives. In addi- tion, the hospital’s medical executive committee is actively included in strategy formulation. “As a result, 90 percent of SMC’s physicians report that they are engaged and aligned with the organiza- tion” (Baldrige Performance Excellence Program, 2011, An empowered and involved workforce section, para. 4).

To create its 2011–2015 strategic plan, the board of directors at Mercy Hospital in Moose Lake, Minnesota began the planning process by studying the critical factors affecting current activities and the hospital’s future direction. This analysis, which included a phone survey of 475 people in the community, led the board to identify key initiatives focused on quality, service, growth, human resources, community, and finance (Mercy Hospital, 2011).

Most HSOs operate somewhere in between these two extremes. Because the efficacy of the board-management relationship differs so much, it is difficult to generalize. What would be useful instead would be to summarize some things a board could and should do to be involved in the strategic planning process:

• If at all possible, the board should nominate a strategy planning committee whose responsibility would be to monitor the strategic decisions being made by top management and involve the whole board if circumstances warrant.

• In the absence of a board-appointed committee, it may be advisable to have at least one board member present at all planning meetings as an observer.

• Have the director of strategic planning—or the CEO if one doesn’t exist— send summaries of all reports and research done in preparation for planning meetings.

Stockbyte/Comstock/Thinkstock

The board of directors may “rubber-stamp” executive decisions in two situations: when there is a high degree of trust between the board and the CEO, and when board members have been handpicked by the CEO and agree with all of his or her decisions.

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CHAPTER 7Summary & Resources

• Ask probing questions at board meetings of the CEO and CFO, especially during the strategy formulation process. If the board gets an inkling of the direction in which the CEO wants to take the organization and it disagrees, and if each side is adamant that its direction is right, it is the CEO who is dismissed.

• Above all, it is the board’s fiduciary responsibility to ensure that the direction and strategy the organization moves in is in its best interest; it has to do what- ever it must to carry out that duty.

Discussion Questions

1. Somehow, the board of directors has to maintain good relationships with the top manage- ment of the organization and yet stay at arm’s length, so to speak, to properly perform its role of overseer. How can it best manage this tension?

2. Imagine yourself as a board member: You notice that all is not right between the CEO and the CFO and certain other board members. What would you do?

3. As a board member, you have a sudden insight as to what the organization might do strate- gically in the future. What do you do with this idea?

4. If the CEO and CFO are insider members of the board, is there any justification for the board appointing a strategic planning committee?

Summary & Resources

Chapter Summary

• The criteria matrix is a useful method for evaluating and choosing among alter- native strategies using a number of criteria. However, selecting the criteria to use is subjective and could affect the outcome. Criteria should be related to what “success” means to the HSO.

• Ideally, only five to six criteria are used to evaluate alternative strategies, as too few would fail to capture the complexity of a future strategic direction and too many would dilute the impact that each criterion would have on the outcome.

• The criteria matrix consists of a table with the alternative strategies and criteria listed. A simple 1 to 3 scoring system might be effective in some situations. In other situations, a 0 to 10 scoring system can be used. The magnitude of the rat- ings is nearly as important as the relative ratings across strategies. At times, the ratings and even the criteria may need to be changed to ensure the “winning” strategies are clearly the best and a persuasive argument can be made for adopt- ing these strategies.

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CHAPTER 7Summary & Resources

• Besides choosing a winning strategy, an HSO needs to make strategic decisions that include organization-wide objectives, strategic intent, major programs, and triggers and contingencies. Organization-wide objectives are targets the whole HSO is responsible for achieving, whereas functional objectives apply only to functional departments, partial objectives are subsumed under other objectives, and operational objectives are other kinds of nonstrategic objectives. The latter three types of objectives are operational, not strategic. Objectives are quantita- tive targets to be achieved in a specified time frame, whereas goals are simply qualitative end states to be achieved in the future that, while they may sound inspirational, lack incentives and accountability.

• Because things may go wrong despite the best planning, well-managed HSOs will do contingency planning. For each contingency, an external assumption that might be “soft” or uncertain (what could go wrong) is identified. Then, a quantita- tive trigger (when should the HSO do something different to correct the situation and what the HSO would do if the trigger were reached) is defined. Organiza- tions that prepare themselves in this way fare better than those that do not.

• The board of directors has to be kept informed and involved throughout the strategic decision-making process. While their involvement varies from hands- off to taking over the strategic decision making completely, boards would do well to do some of the following: strengthen their relationship with the CEO and CFO (insider board members), appoint a planning committee, sit in on planning meetings, or receive summaries of all reports and research done in preparation for meetings.

Web Resources http://www.ccl.org The Center for Creative Leadership offers practical information and cutting-edge research on leadership issues, including development and implementation of strategic plans and contingency planning.

http://ctb.ku.edu/en/default.aspx The Community Tool Box is a service of the Work Group for Community Health and Development at the University of Kansas. It contains free information on creating healthy communities, including techniques for planning and implementing various public health strategies.

http://www.healthykansans2010.org/tobacco This website details the strategic planning work of the Kansas Tobacco Prevention for Specific Populations workgroup.

http://www.nist.gov/baldrige The criteria for the Baldrige National Quality Award, including requirements for strategic management activities, are available on the Baldrige Program website.

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CHAPTER 7Summary & Resources

Key Terms contingency Back-up plan and precur- sor to a contingency plan. It is a response to a particular trigger: what an organiza- tion might do differently if that trigger occurred.

contingency planning A process in which one outlines what could go wrong in the future (trigger) and what the organization would do differently were that to happen (contingency); good contingency planning counteracts Murphy’s Law (“If anything can go wrong, it will”).

contingency plan Plan that differs from a contingency only in adding operational details, like who is responsible for admin- istering the plan, the budget and schedule, and who must keep the plan current over time.

criteria matrix A matrix for evaluating alternative strategies using criteria impor- tant to the organization. It uses a scoring system that enables the results of each criterion to be added up at the end. Abso- lute ratings are not important, but relative ratings are.

functional objectives Objectives that pertain only to a particular function, like increasing the number of clinic locations (marketing) or reducing orthopedic service purchases (only one functional area).

goal A qualitative end state that an orga- nization tries to achieve. Unlike an objec- tive, a goal is not measurable.

objective A quantitative target to be achieved within a specified time frame.

operational objectives Objectives that either are subsumed by higher-order objectives (like reducing costs) or concern, for example, reducing patient complica- tions, none of which comes under any “function.”

partial objectives Objectives that cover part of some activity, like private insur- ance revenue versus Medicare revenue, or increased volume from new services versus all services.

return on investment (ROI) A measure of the rate of return on a particular invest- ment. Profitability for a given time period is a common ROI measure.

trigger–contingency pairs Phrases used to describe something important that could go wrong and how the HSO would then resolve the issue.

triggers Potential setbacks experienced by a company that are associated with contingencies; triggers should be external, specific, and quantitative.

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