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1 The Nature of Strategic Management

Introductory Incident

It Can Be Done: Premier Healthcare Alliance Accountable Care Collaboratives Are Saving Lives and Saving Costs

Statistics show that health care costs have been growing at an unsustainable rate, reaching an

estimated 17.3 percent of gross domestic product (GDP) in 2009, according to the Centers for

Medicare and Medicaid Services (CMS), representing the largest one-year increase in history

when the nation itself was in the midst of the “great recession.” Predictions are for health care

costs to be 19.3 percent of GDP in 2019 (four times the 5.1 percent of GDP in 1960). Despite the

high cost of health care, gaps and inequities persisted, leading to health care reform. The 2010

Patient Protection and Aff ordable Care Act (PPACA), or commonly Aff ordable Care Act (ACA) is

attempting to change the US health care system from a volume-based to a value-based model.

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

— CHARLES DARWIN

Ginter, Peter M.. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2013. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/apus/detail.action?docID=1138986. Created from apus on 2019-05-07 18:10:47.

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2 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

Premier Healthcare Alliance believes that accountable care organizations (ACOs) are the

way to better align the incentives and needs of all stakeholders. Premier ’s components to

the ACO model include:

● People-centered health homes that deliver primary care and coordinate with other

providers as needed.

● New approaches to primary, specialty, and hospital care that reward care coordination,

effi ciency, and productivity.

● Tightly integrated relationships with specialists, ancillary providers, and hospitals to provide

focus and alignment on achieving high-value outcomes.

● Provider/payer partnerships and reimbursement models that reward improved outcomes

(value over volume).

● Population health information infrastructure, including health information exchanges to

enable care across a designated population.

The goal is to incentivize health and wellness, rather than paying for treating disease. ACOs

actually began in 2005, when CMS began the Physician Group Practice demonstration. Its suc-

cess in developing incentives based on the quality of care provided and the estimated savings

generated for the Medicare population served, led to the formation of the Medicare Payment

Advisory Commission (MedPAC) to begin looking for real ways to reduce costs, while improving

quality of care and patient satisfaction. ACOs were incorporated into the Aff ordable Care Act

legislated in March 2010.

Premier Healthcare Alliance has developed a proven model for ACOs based on the following

key elements:

● Establish goals and mission – create a defi nition of areas to address and what the

collaborative will do to fulfi ll its mission.

● Defi ne consistent measures of success – common measures that will be used to improve

defi ned outcomes.

● Data collection and normalization – use standardized data sets to meaningfully compare

results across participants.

● Transparency – participants commit to open sharing of performance data across the

collaborative to identify the top performers and learn from them.

● Driver analysis and collaborative execution – using transparent data, the collaborative can

set performance targets, identify opportunities for improvement, and establish areas of

focus.

● Share best practices – share across the collaborative to realize improvement gains.

● Performance improvement analysis – analyze data from the cohort and individuals to

highlight trends/opportunities that will drive performance and achieve goals.

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 3

Premier established QUEST®: High-Performing Hospitals collaborative (200 not-for-profi t

hospitals in 31 states) for hospitals to learn from the top performers and develop and imple-

ment systemic improvements across their organizations. Three goals drove the process: save

lives, safely reduce the cost of care, and deliver the most reliable and eff ective care. In three

years, QUEST hospitals saved an estimated 22,164 lives and reduced health care spending by

$2.13 billion (national translation would be more than 86,000 lives and $25 billion saved).

Source: Premier Healthcare Alliance, Inc.

Learning Objectives

After completing the chapter you will be able to:

1. Explain why strategic management has become crucial in today’s dynamic

health care environment.

2. Trace the evolution of strategic management and discuss its conceptual

foundations.

3. Describe and explain the concept of strategic thinking maps.

4. Defi ne and diff erentiate between strategic management, strategic thinking,

strategic planning, and managing strategic momentum.

5. Understand the necessity for both the analytic and emergent models of strategic

management.

6. Understand how an organization may realize a strategy that it never intended.

7. Understand the benefi ts of strategic management for health care organizations.

8. Understand the importance of systems approaches.

9. Explain the links between the diff erent levels of strategy within an organization.

10. Describe the various leadership roles of strategic management.

Managing in a Dynamic Environment

The dramatic changes in the health care industry that began in the 1980s, marked by the implementation of Medicare ’s prospective payment system in 1983, con- tinue today (see Perspective 1–1 for an overview of the Patient Protection and Affordable Care Act – the most signifi cant change for health care since the pas- sage of Medicare and Medicaid in the 1960s, and still changing as components are tested in courts and in its phased-in implementation). As a result, health care institutions continue to face a turbulent, confusing, and often threatening

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4 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

environment. Signifi cant change comes from many sources, including: legislative and policy initiatives; international as well as domestic economic and market forces; demographic shifts and lifestyle changes; technological advances; and fundamental health care delivery changes. Certainly, health care systems, as well as other domestic and international health care organizations, have had to continuously adapt to these and other changes. As suggested in the introductory quote, health care organizations will have to be responsive to and effectively manage change in this dynamic environment.

PERSPECTIVE 1–1

The Patient Protection and Affordable Care Act (PPACA)

The PPACA was enacted in March of 2010; most

of its provisions go into eff ect in 2014. This com-

plex law has many provisions; some of the more

important ones are summarized here.

First, the law requires most US citizens and

legal residents under age 65 to have health

insurance; this is the “insurance mandate.” The

law provides fi nancial penalties, if one does not

obtain coverage, and it provides subsidies, if one

has suffi ciently low household income.

Second, the law requires large employers,

those with 50 or more employees, to provide

health insurance to their workers who work 30 or

more hours per week. Failure to do so results in

fi nancial penalties on the employer. The most sig-

nifi cant of these is a fi ne of $2,000 per uninsured

worker. Firms with less than 50 workers are not

required to off er coverage, but receive short-term

(two-year) subsidies if they choose to do so.

Third, the law requires the establishment of

“health insurance exchanges” in each state. The

states have discretion in how these organiza-

tions operate, but if a state fails to establish an

exchange, the federal government will operate

one in the state. Exchanges are virtual market-

places where individuals and small employers

can compare coverage from diff erent insurers,

obtain subsidies if they are eligible, and buy

insurance. The state exchange has to be self-

suffi cient, covering the administrative costs by

taxes or fees.

Fourth, within the exchanges individuals

and small fi rms may buy “platinum,” “gold,” “sil-

ver,” and “bronze” coverage. Each of these tiers

refl ects coverage of the same “essential health

benefi ts” at a diff erent expenditure level. A silver

plan, for example, must cover 70 percent of the

costs of the benefi t package, with the subscriber

paying the other 30 percent out of pocket.

Each insurer may off er several combinations of

deductibles, copays, and coinsurance features to

meet the spending level in each tier. The states,

with strong guidance from the federal gov-

ernment, determine what constitutes “essential

health benefi ts.”

Fifth, the law required the states to expand

the Medicaid programs to include citizens and

legal residents between ages 19 and 64, inclu-

sive, if their income was below 139 percent of

the federal poverty line. The Supreme Court

found the provision enforcing this expansion to

be unconstitutional. As a result, the states now

have the option to expand Medicaid. If they do

so, the federal government will initially pay 100

percent of the costs of the expansion, declining

to 90 percent by 2019.

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 5

This legislation poses a number of issues for

states, for employers, and for health care provid-

ers. The challenges include:

● Should a state undertake the Medicaid

expansion? The expansion provides cover-

age to many uninsured people in the state

and is largely paid for with federal dol-

lars. However, state Medicaid budgets are

already strapped.

● Should the state create an insurance

exchange tailored, to the extent

possible, to the preferences of the state, or

should it simply let the federal government

do it? Exchanges are to be “self-sustaining;”

how will the administrative functions be

funded?

● Should a smaller employer who currently

off ers coverage, drop the coverage, raise

wages, and encourage her employees to

buy coverage through the exchange?

● Large employers are required to off er

coverage or pay a fi ne. Should they

drop coverage, forget the headaches of

employer-sponsored coverage, and just pay

the fi ne?

● How is a hospital aff ected by PPACA?

There will be fewer uninsured, but

patient copays and deductibles may

be larger and government payments

(i.e., Disproportionate Share payments)

to care for the poor and uninsured

will be reduced.

SUGGESTED READING

J. P. Newhouse, “Assessing Health Reform ’s Impact

on Four Key Groups of Americans,” Health

Aff airs 29, no. 9 (2010), pp. 1714–1724.

Sources: Michael A. Morrisey, PhD, Director, Lister Hill Center for

Health Policy and Department of Health Care Organization and

Policy, University of Alabama at Birmingham.

Coping with Change How can health care leaders deal with change? Which issues are most impor- tant or most pressing? Furthermore, what new issues will emerge? It is likely that there will be new issues for health care organizations that have yet to be identifi ed or fully assessed. Even more sobering, it seems certain that there will be more change in the health care industry in the next 10 years than there has been in the past 10 years.

Dealing with rapid, complex, and often discontinuous change requires lead-

ership. Successful health care organizations have leaders who understand the nature and implications of external change, the ability to develop effective strategies that account for change, and the will as well as the ability to actively manage the momentum of the organization. These activities are collectively referred to as “strategic management.” The clearest manifestation of leadership in organizations is the presence of strategic management and its activities. Strategic management is fundamental in leading organizations in dynamic environments. Strategic management provides direction and momentum for change.

Organizational change is a fundamental part of success. As health care lead- ers chart new courses into the future, in effect, they create new beginnings, new

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6 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

chances for success, new challenges for employees, and new hopes for patients. Therefore, it is imperative that health care managers understand the changes tak- ing place in their environment; they should not simply be responsive to them, they must create the future. Health care leaders must see into the future, create new visions for success, and be prepared to make signifi cant improvements.

The Foundations of Strategic Management

In political and military contexts, the concept of strategy has a long history. For instance, the underlying principles of strategy were discussed by Sun Tzu, Homer, Euripides, and many other early strategists and writers. The English word strategy comes from the Greek strat–eg– –os , meaning “a general,” which in turn comes from roots meaning “army” and “lead.” 1 The Greek verb strat–eg–e –o means “to plan the destruction of one ’s enemies through effective use of resources.” 2 Similarly, many of the terms commonly used in relation to strategy – objectives, strategy, mission, strengths, weaknesses – were developed by the military.

Long-Range Planning to Strategic Planning The development of strategic management began with much of the business sector adopting long-range planning. Long-range planning was developed in the 1950s in many organizations because operating budgets were diffi cult to prepare without some idea of future sales and the fl ow of funds. Post-WWII economies were growing and the demand for many products and services was accelerating. Long-range forecasts of demand enabled managers to develop detailed mar- keting and distribution, production, human resources, and fi nancial plans for their growing organizations. The objective of long-range planning is to predict for some specifi ed time in the future the size of demand for an organization ’s products and services and to determine where demand will occur. Many organi- zations have used long-range planning to determine facilities expansion, hiring forecasts, capital needs, and so on.

As industries became more volatile, long-range planning was replaced by stra- tegic planning because the assumption underlying long-range planning is that the organization will continue to produce its present products and services – thus, matching production capacity to demand is the critical issue. However, the assumption underlying strategic planning is that there is so much economic, social, political, technological, and competitive change taking place that the leadership of the organization must periodically evaluate whether it should even be offering its present products and services, whether it should start offering different products and services, or whether it should be operating and marketing in a fundamentally different way.

Although strategies typically take considerable time to implement, and thus are generally long range in nature, the time span is not the principal focus of strategic planning. In fact, strategic planning, supported by the management of the strategy, compresses time. Competitive shifts that might take generations to evolve instead occur in a few short years. 3 In a survey of senior executives, 80 percent indicated that the productive lives of their strategies were getting shorter and 75 percent believed that their leading competitor would be different within

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 7

fi ve years. 4 Therefore, it is preferable to use “long range” and “short range” to describe the time it will take to accomplish a strategy rather than to indicate a type of planning.

Strategic Planning to Strategic Management The 1960s and 1970s were decades of major growth for strategic planning in business organizations. Leading companies such as General Electric were not only engaged in strategic planning but also actively promoted its merits in the business press. The process provided these fi rms with a more systematic approach to managing business units and extended the planning and budgeting horizon beyond the traditional 12-month operating period. In addition, business managers learned that fi nancial planning alone was not an adequate frame- work. 5 In the 1980s the concept of strategic planning was broadened to strate- gic management. This evolution acknowledged not only the importance of the dynamics of the environment and that organizations may have to totally reinvent themselves, but also that continuously managing and evaluating the strategy are keys to success. Thus, strategic management was established as an approach or philosophy for managing complex enterprises and, as discussed in Perspective 1–2 , should not be viewed as a passing fad.

Strategic Management in the Health Care Industry Strategic management concepts have been employed within health care organi- zations only in the past 30 to 35 years. Prior to this time, individual health care organizations had few incentives to employ strategic management because typi- cally they were independent, freestanding, not-for-profi t institutions, and health services reimbursement was on a cost-plus basis. In many respects health care has become a complex business using many of the same processes and much of the same language as the most sophisticated business corporations. Certainly, in the late 1980s and 1990s many health care organizations had much to learn from strategically managed businesses. As a result, many of the management methods adopted by health care organizations, both public and private, initially were developed in the business sector.

PERSPECTIVE 1–2

Are the Following Management Approaches Fads?

Management fads? Management techniques?

Management fads is usually the fl ippant

answer. However, each of these management

approaches was a genuine attempt to change

and improve the organization – to focus eff orts,

to improve the quality of the products and

services, to improve employee morale, to do

more with less, to put meaning into work, and so

on. Some of the approaches worked better than

others; some stood the test of time and others

did not. Yet, it would be too harsh to simply

dismiss them as fads or techniques. The goals

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8 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

for all of these management approaches were to

manage and shape the organization – to make it

better, to make it an excellent organization. One

of the things that has distinguished all of these

“fads” is the enthusiasm and commitment they

have engendered among managers and work-

ers. For many, these approaches have signifi -

cantly increased the meaning of work – no small

accomplishment in an era in which people are

increasingly hungry for meaning. And certainly

organizations need to create meaning. 1

1950s

● Theories X and Y

● Management by Objectives

● Quantitative Management

● Diversifi cation

1960s

● Managerial Grid

● T-Groups

● Matrix Management

● Conglomeration

● Centralization/

Decentralization

1970s

● Zero-Based Budgets

● Participative Management

● Portfolio Management

● Quantitative MBAs

1980s

● Theory Z

● One-Minute Managing

● Organization Culture

● Intrapreneuring

● Downsizing

● MBWA (Management by

Wandering Around)

● TQM/CQI

1990s

● Customer Focus

● Quality Improvement

● Reengineering

● Benchmarking

● Resource-Based View

2000s

● Six Sigma

● Balanced Score Card

● Transformational

Leadership

● Self-Managed Teams

● Dynamic Capabilities

● Virtual Organizations

● Blue Oceans

● The Learning Organization

2010s

● Knowledge Management

● LEAN Six Sigma

● Strategic Mapping

● Black Swan

● Disruptive Innovation

● Predictable Surprises

When management approaches such as

these fail, it is usually because they become an

end in themselves. Managers lose sight of the

real purpose of the approach and the process

becomes more important than the product.

Managers start working for the approach rather

than letting the approach work for them.

What will be the “management fads” of the next

decade? 2 Will you be a part of these or past attempts

to make the organization better or will you sim-

ply dismiss them as fads? Perhaps benchmarking,

quality improvement, the learning organization, or

LEAN Six Sigma will turn your organization around.

One of these approaches may help to make your

organization truly excellent or save it from decline.

Is strategic management just another fad? Will

it stand the test of time? If strategic management

becomes an end in itself, if its activities do not

foster and facilitate thinking, it will not be useful.

However, if strategic management helps man-

agers to think about the future and guide their

organizations through turbulent environments,

strategic management will have succeeded.

REFERENCES

1. J. Daniel Beckham, “The Longest Wave,”

Healthcare Forum Journal 36, no. 6 (November/

December 1993), pp. 78, 80–82.

2. “Rethinking the Cause of Management Fads,”

Strategic Direction 21, no. 4 (2005), p. 28.

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 9

Although the values and practices of for-profi t business enterprises in the pri- vate sector have been advocated as the appropriate model of managing health care organizations, a legitimate question arises concerning the appropriateness of the assumption that business practices may always be relevant to the health care industry. Certainly, not all the “big ideas” have delivered what was promised, even in business. 6 It has been pointed out that:

1. Some strategic alternatives available to non-health care organizations may not be realistic for many health care organizations.

2. Health care organizations have unique cultures that infl uence the style of and participation in strategic planning.

3. Health care has always been subject to considerable outside control. 4. Society and its values place special demands on health care organi zations. 7

However, strategic management, especially when customized to health care, does seem to provide the necessary processes for health care organizations to cope with the vast changes that have been occurring. Over time these business approaches increasingly have been modifi ed to fi t the unique aspects of health care organizations.

Strategic Management Versus Health Policy Planning There has been and continues to be substantial health planning (policy) in the United States. Efforts at health planning are initiated by either state or local gov- ernments and the resulting health policies are implemented through legislation or private or non-governmental agencies. Many of these planning efforts are disease specifi c; that is, they are categorical approaches directed toward specifi c health problems (e.g., the work of the National Tuberculosis Association that stimulated the development of state and local government tuberculosis preven- tion and treatment programs). 8 As a result, a variety of state and federal health planning or policy initiatives have been designed to: (1) enhance quality of care and reduce medical errors; (2) provide or control access to care; and (3) contain costs.

These health-planning efforts are not strategic management. Health planning is the implementation of local, state, and federal health policy and affects a variety of health care organizations. As explained in Perspective 1–3 , the intent of health policy is to provide the context for the development of the health care infrastructure as a whole. In contrast, strategic management is organization spe- cifi c. Strategic management helps an individual organization to respond to state and federal policy and planning efforts, as well as to a variety of other external forces.

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10 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

PERSPECTIVE 1–3

What is Health Policy?

Health policy determines the rules of the game

that apply to all consumers and providers in the

fi eld. It is the development and maintenance

of an infrastructure to effi ciently enhance the

health of the public.

An infrastructure need not imply a govern-

mentally fi nanced health care system nor the

delivery of services by a governmental entity.

What it does imply is a set of institutions that

meet the preferences of most of the society.

These institutions can take many forms, rang-

ing from unfettered markets to the provision of

services by governments.

The role of health policy is to determine the

preferences of the society and to develop and fi ne

tune institutions that can effi ciently meet those

preferences. Meeting preferences may mean

defi ning the ground rules under which insurers

and providers compete. It may mean defi ning

those services that will be provided by only a sin-

gle provider, and then deciding whether that pro-

vider will be a public or private organization. It will

certainly mean revisiting these decisions as new

ways of doing things and new problems emerge.

The Congress and the state legislatures set

health policy. In addition, the administrative

authority given to executive branches and

their agencies sets policy. Therefore, the Center

for Medicare and Medicaid Services deter-

mines much of the health policy for federal

Medicare and Medicaid. The Centers for Disease

Control and Prevention, the Food and Drug

Administration, and the Occupational Health and

Safety Administration set and enforce health and

safety standards. State departments of health,

insurance, and environmental quality set health

policy within their own spheres of infl uence.

There are many analytic tools that come into

play in helping to determine the rules that are

adopted. These include economics, law, political

science, epidemiology, medicine, and health ser-

vices research. Health policy questions are some-

times very broad and at other times very specifi c.

Some important questions include:

● Is health care a right or an individual

responsibility?

● Can the human costs of poor health be

quantifi ed?

● Can higher taxes on saturated fats reduce

the prevalence of obesity?

● Would a refundable tax credit encourage

the uninsured to buy coverage?

● Would higher incomes or more health

services do more to improve health status?

● Who pays if employers are required to

provide health insurance?

Source: Michael A. Morrisey, PhD, Director, Lister Hill Center for

Health Policy and Department of Health Care Organization and

Policy, University of Alabama at Birmingham.

The Dimensions of Strategic Management

There are many ways to think about strategic management in organizations. In fact, Henry Mintzberg identifi ed ten distinct schools of thought concerning organ- izational strategy. 9 Three of these approaches were prescriptive and analytical:

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 11

the design school, the planning school, and the positioning school. Six schools of thought were descriptive and emergent: the entrepreneurial school, the cogni- tive school, the learning school, the political school, the cultural school, and the environmental school. The fi nal school of thought, the confi gurational school, specifi es the stages and sequence of the process and attempts to place the fi nd- ings of the other schools in context. 10

Analytical Versus Emergent Approaches Given the careful reasoning of the proponents of these various approaches to strategic management, it is safe to assume that there is no one best way to think or learn about strategy making in complex organizations. Analytical or rational approaches to strategic management rely on the development of a logi- cal sequence of steps or processes (linear thinking). Emergent models, on the other hand, rely on intuitive thinking, leadership, and learning and are viewed as being a part of managing. Both approaches are valid and useful in explain- ing an organization ’s strategy. However, neither the analytical approach nor the emergent view, by itself, is enough. David K. Hurst explains:

“The key question is not which of these approaches of action is right, or even which is better, but when and under what circumstances they are use- ful to understand what managers should do. Modern organizational life is characterized by oscillations between periods of calm, when prospective rationality seems to work, and periods of turmoil, when nothing seems to work. At some times, analysis is possible; at other times, only on-the- ground experiences will do.” 11

As a result, both approaches are required. It is diffi cult to initiate and sustain organizational action without some predetermined logical plan. Yet in a dynamic environment, such as health care, managers must expect to learn and establish new directions as they progress. The analytical approach is similar to a map, whereas the emergent model is similar to a compass. Both may be used to guide one to a destination. Maps are better in known worlds – worlds that have been charted before. Compasses are helpful when leaders are not sure where they are and have only a general sense of direction. 12

Managers may use the analytical approach to develop a strategy (map) as best they can from their understanding of the external environment and by interpreting the capabilities of the organization. Once they begin pursuing the strategy, new understandings and strategies may emerge and old maps (plans) must be modifi ed. Harvard Professor Rosabeth Moss Kanter concluded from her research that pacesetter organizations “did not wait to act until they had a perfectly conceived plan; instead, they create the plan by acting.” 13 Therefore, managers must remain fl exible and responsive to new realities – they must learn. However, the direction must not be random or haphazard. It must be guided by some form of strategic sense – an intuitive, entrepreneurial sens- ing of the “shape of the future” that transcends ordinary logic. The concept of the compass provides a unique blend of thinking, performance, analysis, and intuition. 14

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12 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

What is needed is some type of model that provides guidance or direction to strategic managers, yet incorporates learning and change. If strategy making can be approached in a disciplined way, then there will be an increased likelihood of its successful implementation. A model or map of how strategy may be devel- oped will help organizations to view their strategies in a cohesive, integrated, and systematic way. 15 Without a model or map, managers run the risk of becom- ing totally incoherent, confused in perception, and muddled in practice. 16

Combining the Analytical and Emergent Views In this text, a series of “strategic thinking maps” are presented. These maps are designed to ignite strategic thinking as well as strategic planning and foster new thinking and planning when required. The strategic thinking maps will start the journey to develop a comprehensive strategy for the organization, yet the maps cannot anticipate every contingency. Managers will learn a great deal about their strategic plans as they manage them. Therefore, strategic managers will have to think, analyze, use intuition, and reinvent the strategy as they go. As the physi- cist David Bohm observed, the purpose of science is not the “accumulation of knowledge” but rather the creation of “mental maps” that guide and shape our perception and action. 17

A model or map that accounts for both the analytical and the emergent views of strategic management is presented in Exhibit 1–1 . This strategic thinking map serves as a general model for health care strategic managers, illustrates the inter- relationships and organizes the major components, and provides the framework for much of the discussion in this book. As illustrated in Exhibit 1–1 , strategic management has three elements – strategic thinking, strategic planning, and managing strategic momentum. These activities are interdependent; activities in each element affect, and are affected by, the others.

Strategic Planning Situational Analysis

• External Analysis • Internal Analysis • Directional Strategies

Ex ter

na l

En vir

on me

External Environment

Strategic Thinking • External Orientation • Analyze Data • Question Assumptions • Generate New Ideas

Strategy Formulation • Directional Strategies • Adaptive Strategies • Market Entry Strategies • Competitive Strategies

Planning the Implementation • Service Delivery Strategies • Support Strategies • Action Plans

Managing Strategic

Momentum • Managerial Action • Strategy Evaluation • Emergent Learning • Re-initiate Strategic

Thinking

External Environment

EXHIBIT 1–1 Strategic Thinking Map of Strategic Management

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Strategic managers must become strategic thinkers with the ability to evalu- ate the changing environment, analyze data, question assumptions, and develop new ideas. Additionally, they must be able to develop and document a plan of action through strategic planning. Strategic planning is a decision-making and documentation process that creates the strategic plan. Once a strategic plan is developed, strategic managers must manage the strategic momentum of the organization. As strategic managers attempt to carry out the strategic plan they evaluate its success, learn more about what works, and incorporate new stra- tegic thinking. As indicated by the double-headed arrows in Exhibit 1–1 , any one element of the model may initiate a rethinking of another element. For example, planning the implementation may provide new information that neces- sitates taking another look at strategy formulation. Similarly, managing strategic momentum may provide new insights for implementation planning, strategy formulation, or the situational analysis .

The distinction among the terms strategic thinking, strategic planning, and managing strategic momentum is important and all three activities must occur in truly strategically managed organizations. Therefore, each stage of the model is explored in more depth.

Strategic Thinking The fi rst stage depicted in Exhibit 1–1 is strategic thinking and is the fundamen- tal intellectual activity underlying strategic management. It has been observed that leaders, similar to great athletes, must simultaneously play the game and observe it as a whole. 18 Mired in a complex situation, the leader must rise above it to understand it. Preserving distance may be the only way to see the full pic- ture. 19 This skill is similar to leaving the playing fi eld and going to the press box to observe the game and see its broader context. Thus, strategic managers must be able to keep perspective and see the big picture – not get lost in the action. But to truly understand the big picture, one must not only go to the press box to observe the “game,” but must also have a “quiet room” to periodically think about it, to understand it, and perhaps to change the strategy or players.

Strategic thinking is an individual intellectual process, a mindset, or method of intellectual analysis that asks people to position themselves as leaders and see the “big picture.” Vision and a sense of the future are inherent parts of stra- tegic thinking. Strategic thinkers are constantly reinventing the future – creating windows on the world of tomorrow. James Kouzes and Barry Posner in The Leadership Challenge have indicated: “All enterprises or projects, big or small, begin in the mind ’s eye; they begin with imagination and with the belief that what is merely an image can one day be made real.” 20 Strategic thinkers draw upon the past, understand the present, and envision an even better future. Strategic thinking requires a mindset – a way of thinking or intellectual process that accepts change, analyzes the causes and outcomes of change, and attempts to direct an organization ’s future to capitalize on the changes. More specifi cally, strategic thinking:

● acknowledges the reality of change,

● questions current assumptions and activities,

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14 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

● builds on an understanding of systems,

● envisions possible futures,

● generates new ideas, and

● considers the organizational fi t with the external environment.

Strategic thinking generates ideas about the future of an organization and ways to make it more relevant – more in tune with the world. Strategic thinking assesses the changing needs of the organization ’s stakeholders and the chang- ing technological, social and demographic, economic, legislative/political, and competitive demands of its world.

Strategic thinkers are always questioning: “What are we doing now that we should stop doing?” “What are we not doing now, but should start doing?” and “What are we doing now that we should continue to do but perhaps in a funda- mentally different way?” For the strategic thinker, these questions are applicable to everything the organization does – its products and services, internal processes, policies and procedures, strategies, and so on. Successful strategies often require being what you haven ’t been, thinking as you haven ’t thought, and acting as you haven ’t acted. 21 Strategic thinkers examine assumptions, understand systems and their interrelationships, and develop alternative scenarios of the future. Strategic thinkers forecast external technological, social and demographic changes, as well as critical changes in the legislative and political arenas. Strategic thinking is very much a leadership activity and quite different from what subject matter experts do. For example, strategic thinkers specialize in relationships and context whereas expert thinkers specialize in well-defi ned disciplines and functions. Strategic think- ers act on intuition and “gut feel” when data is incomplete – focus on action and moving forward where as experts pay rigorous attention to knowledge, evidence, and data – focus on understanding.

Everyone a Strategic Thinker Strategic thinking provides the foundation for strategic management. However, strategic thinking is not just the task of the CEO, health offi cer, or top administrator of the organization. For strategic management to be successful, everyone must be encouraged to think strategically – think as a leader. Leadership is a performing art – a collection of practices and behaviors – not a position. 22 Everyone, even the lowest paid employees, should be encour- aged to think strategically and consider how to reinvent what he or she does. For example, understanding that a nursing home ’s image is based on the customers’ perception of cleanliness can motivate custodians to think strategically and rein- vent the way the nursing home is cleaned. Strategic thinking is supported by the continuous management of the strategy and documented through the periodic process of strategic planning.

Strategic Planning Strategic planning is the next activity in the general model of strategic manage- ment illustrated in Exhibit 1–1 . Strategic planning is the periodic process of developing a set of steps for an organization to accomplish its mission and vision using strategic thinking. Therefore, periodically, strategic thinkers come together

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 15

to reach consensus on the desired future of the organization and develop deci- sion rules for achieving that future. The result of the strategic planning process is a plan or strategy. More specifi cally, strategic planning:

● provides a sequential, step-by-step process for creating a strategy,

● involves periodic group strategic thinking (brainstorming) sessions,

● requires data/information, but incorporates consensus and judgment,

● establishes organizational focus,

● facilitates consistent decision making,

● reaches consensus on what is required to fi t the organization with the external environment, and

● results in a documented strategic plan.

The process of strategic planning defi nes where the organization is going, sometimes where it is not going, and provides focus. The plan sets direction for the organization and – through a common understanding of the vision and broad strategic goals – provides a template for everyone in the organization to make consistent decisions that move the organization toward its envisioned future.

Strategic planning, in large part, is a decision-making activity. Although these decisions are often supported by a great deal of quantifi able data, strategic deci- sions are fundamental judgments. Because strategic decisions cannot always be quantifi ed, managers must rely on “informed judgment” in making this type of decision. As in our own lives, generally the more important the decision, the less quantifi able it is and the more we will have to rely on the opinions of others and our own best judgment. For example, our most important personal decisions – where to attend college, whether or not to get married, where to live, and so on – are largely informed judgments. Similarly, the most important organizational decisions, such as entering a market, introducing a new service, or acquiring a competitor, although based on information and analysis, are essentially judgments.

Decision consistency is central to strategy; when an organization exhibits a consistent behavior it has a strategy. Strategy is the set of guidelines or plan an organization chooses to ensure decision consistency and move it from where it is today to a desired state some time in the future – it is the road map to that future. Developing the road map (strategic plan) requires situational analysis, strategy formulation, and planning the implementation of the strategy.

Analyzing and understanding the situation is accomplished by three separate strategic thinking activities: (1) external environmental analysis; (2) internal environmental analysis; and (3) the development or refi nement of the organi- zation ’s directional strategies. The interaction and results of these activities form the basis for the development of strategy. These three interrelated activi- ties drive the strategy. Forces in the external environment suggest “what the organization should do.” That is, success is a matter of being effective in the environment – doing the “right” thing. Strategy is additionally infl uenced by the internal resources, competencies, and capabilities of the organization and represents “what the organization can do.” Finally, strategy is driven by a

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16 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

common mission, common vision, and common set of organizational values and goals – the directional strategies.

The directional strategies are the result of considerable thought and analysis by top management and indicate “what the organization wants to do.” Together, these forces are the essential input to strategy formulation. They are not com- pletely distinct and separate; they overlap, interact with, and infl uence one another. Chapter 2 provides strategic thinking maps for examining the general and health care external environment and Chapter 3 addresses service area competitor analysis. Chapter 4 discusses the internal environment and provides strategic thinking maps for evaluating the organization ’s strengths and weak- nesses and the creation of competitive advantage. The development of the directional strategies through strategic thinking maps is explored in more detail in Chapter 5.

Whereas situational analysis involves a great deal of strategic thinking – gathering, classifying, and understanding information – strategy formulation involves decision making that uses the information to create a plan. Hence, strategy formulation involves directional, adaptive, market entry, and competitive strategy decisions and, typically, these decisions are made in strategic planning sessions. Strategic maps for strategy formulation are presented in Chapters 6 and 7.

Once the strategy for the organization has been formulated (including direc- tional, adaptive, market entry, and competitive), implementation plans that accomplish the organizational strategy are developed. These implementation plans are made up of strategies developed in the key areas that create value for an organization – service delivery and support activities – and are typically discussed as part of strategic planning. Strategies must be developed that best deliver the products or services to the customers through pre-service, point- of-service, and after-service activities. In addition to service delivery strategies, strategies must be developed for value-adding support areas such as the organi- zation ’s culture, structure, and strategic resources. Strategy implementation is discussed further in Chapters 8 through 10.

A Group Process of Key Players The CEO can develop a strategy. A separate planning department can develop a strategy. However, such approaches run into trouble during implementation, as there is no common “ownership” of the plan or the tasks associated with it. Therefore, strategic planning for organizations is typically a group process. It involves a number of key participants working together to develop a strategy. Although strategic planning provides the struc- ture for thinking about strategic issues, effective strategic planning also requires an exchange of ideas, sharing perspectives, developing new insights, critical analysis, as well as give-and-take discussion. Strategic planning efforts will be diminished without future-oriented highly provocative thinking and dialog. 23

For most organizations, it is not possible for everyone to be a full participant in the strategic planning process. Decision making is protracted if everyone must have a say – and a consensus may never be reached. A few key players – senior staff, top management, or a leadership team – are needed to provide balanced and informed points of view. Often, representatives of important functional areas are included as well. An effective leader will incorporate a variety of individuals with different backgrounds and perspectives to provide input to the process. Some

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 17

participants may be mavericks and nudge the group in new ways. If everyone is pre-programmed to agree with the leader, participation is not required – but nei- ther will an actionable plan be realized.

The key to successful strategic planning is to have a recurring group process. Having a periodic structured process initiates a reconsideration, discussion, and documentation of all the assumptions. Without a planned process, managers never quite get to it. Without a process, ideas are not discussed, conclusions are not reached, decisions are not made, strategies are not adopted, and strategic thinking is not documented. The nature of the group and the process are often the keys to success.

Managing Strategic Momentum Sometimes a strategic plan is created but nothing really changes, strategic momentum is lost, and plans are never implemented. As the next year rolls around, it is once again time for the annual strategic planning retreat and the cycle repeats itself. This example is one of strategic planning without managing strategic momentum. Alan Weiss, in his irreverent book, Our Emperors Have No Clothes , explains that in these situations the problem is that, “Strategy is usually viewed as an annual exercise at best, an event that creates a ‘product,’ and not a process to be used to actually run the business.” 24

The third element of strategic management shown in Exhibit 1–1 , managing strategic momentum , concerns the day-to-day activities of managing the strategy to achieve the strategic goals of the organization. Once plans are developed, they must be actively managed and implemented to maintain the momentum of the strategy. Strategic thinking and periodic planning should never stop; they become ingrained in the culture and philosophy of a strategically managed organization. Managing strategic momentum:

● is the actual work to accomplish specifi c objectives,

● concerns decision-making processes and their consequences,

● provides the style and culture,

● evaluates strategy performance,

● is a learning process, and

● relies on and initiates new strategic thinking and new periodic strategic planning.

For many organizations, strategic planning is the easiest part of strategic management and the planning process receives the greatest attention. However, plans must be implemented to create momentum and to realize strategic intent. Poor implementation or lack of implementation has rendered many strategic plans worthless. Whereas the strategic plan and its underlying strategic thinking must be viewed as important, they fall apart without implementation and the decision-making guidelines provided for managers at all levels in the organiza- tion. If the strategy is not actively managed, it will not happen.

At the same time, managers often need to react to unanticipated develop- ments and new competitive pressures. Such environmental shifts may be subtle,

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18 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

other times they can be discontinuous and extremely disruptive. When external changes occur, new opportunities emerge and new competencies are born, while others die or are rendered inconsequential. Inevitably, the basic rules of competing and survival will change. 25 Managing strategic momentum is how an organization constructively manages change, evaluates strategy, and reinvents or renews the organization. As Henry Mintzberg has indicated, “. . . a key to managing strategy is the ability to detect emerging patterns and help them take shape.” 26

Different environmental characteristics and different organizational forms require new and different ways of defi ning strategy. 27 Strategy may be an intui- tive, entrepreneurial, political, culture-based, or learning process. In these cases, maps are of limited value. Managers must create and discover an unfolding future, using their ability to learn together in groups and interact politically in a spontaneous, self-organizing manner. However, learning is diffi cult in organiza- tions. Learning requires engagement, mastering unfamiliar ideas, and adopting new behaviors. Engaged learning demands that executives share leadership, face harsh truths, and take learning personally. It requires them to fundamentally change the way they manage. 28 It requires managing strategic momentum.

Clearly, rational strategies do not always work out as planned (an unreal- ized strategy ). In other cases, an organization may end up with a strategy that was quite unexpected as a result of having been “swept away by events” (an emergent strategy ). Leadership, vision, and “feeling our way along” (learning) often provide a general direction without a real sense of specifi c objectives or long-term outcomes. It is quite possible that a strategy may be developed and subsequently realized. However, we must be realistic enough to understand that when we engage in strategic management the theoretical ideal (strategy devel- oped, then realized) may not, and in all probability will not, be the case. A great deal may change. The possibilities include:

1. There is a reformulation of the strategy during implementation as the organization gains new information and feeds that information back to the formulation process, thus modifying intentions en route.

2. The external environment is in a period of fl ux and strategists are unable to accurately predict conditions; the organization may therefore fi nd itself unable to respond appropriately to a powerful external momentum. 29

3. Organizations in the external environment implementing their own strate- gies may block a strategic initiative, forcing the activation of a contingency strategy or a period of “groping.”

Obviously, health care organizations formulate strategies and realize them to varying degrees. For instance, as a part of a deliberate strategy to broaden their market, improve service to the community, and retain referral patients, many community hospitals began offering cardiac services such as catheterization and open heart surgery. As a result, some of these hospitals have built market share and increased profi tability. Other community hospitals have not fared as well. Their managers had unrealistic expectations concerning the profi tability of cardiac services and the number of procedures required. A large volume is

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 19

crucial to cardiac services because it allows the hospital to order supplies in bulk and provides physician experience that produces better outcomes and shorter lengths of stay. In addition, some community hospital managers misjudged the level of reimbursement from Medicare, thereby further squeezing profi tability. The strategies of those community hospitals that left the cardiac services market were not realized.

Still other community hospitals seemed to move into a full range of cardiac services without an explicit strategy to do so. In an effort to retain patients and enhance their images, these hospitals began by offering limited cardiac services but shortly found that they were not performing enough procedures to be “world class.” They added services, equipment, and facilities to help create the required volume and, without really intending to at the outset, ended up with emergent strategies that resulted in signifi cant market share in cardiac services.

Everyone Must Manage the Strategic Momentum As with strategic think- ing, everyone plays a role in managing strategic momentum. Everyone in the organization should be working for the strategy and understand how their work contributes to the accomplishment of the strategic goals. As Max DePree has suggested, “Leaders are obligated to provide and maintain momentum.” 30 The only legitimate work in an organization is work that contributes to the accom- plishment of the strategic plan. Although organizations may accomplish superior results for a brief period of time, it takes the orchestration of management as well as leadership to perpetuate these capabilities far into the future. 31

The Benefi ts of Strategic Management

The three stages of strategic management – strategic thinking, strategic planning, and managing strategic momentum – will provide many benefi ts to health care organizations. However, because strategic management is a philosophy or way of managing an organization, its benefi ts are not always quantifi able. Overall, strategic management:

● ties the organization together with a common sense of purpose and shared values;

● improves fi nancial performance in many cases; 32

● provides the organization with a clear self-concept, specifi c goals, and guidance as well as consistency in decision making;

● helps managers to understand the present, think about the future, and recognize the signals that suggest change;

● requires managers to communicate both vertically and horizontally;

● improves overall coordination within the organization; and

● encourages innovation and change within the organization to meet the needs of dynamic situations.

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20 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

Strategic management is a unique perspective that requires everyone in the organization to cease thinking solely in terms of internal functions and opera- tional responsibilities. It insists that everyone adopts what may be a fundamen- tally new attitude – an external orientation and a concern for the big picture. It is basically optimistic in that it integrates “what is” with “what can be.” Perspective 1–4 illustrates an application of Jim Collins’ book, Good to Great , to health care organizations.

PERSPECTIVE 1–4

Good to Great in Health Care

Several years ago Jim Collins’ book, Good to Great:

Why Some Companies Make the Leap . . . and

Others Don't , made an impact on the business

scene. Collins studied 1,435 good companies and

then analyzed why 11 of the companies became

great (see Health Care Manager ’s Bookshelf in

Chapter 8). Chip Caldwell & Associates began

a “good to great” project in health care and

studied 44 health care organizations ranging in

size from 15 to 854 beds. An additional project

conducted by the group assessed 226 health-

related organizations in Los Angeles County,

California. For each organization they meas-

ured changes in cost per case mix adjusted dis-

charge. Those organizations that fi nished in the

75th percentile or higher were labeled quantum

improvers and those in the bottom quartile were

labeled non-starters.

About 20 percent of the quantum improv-

ers were already in a favorable cost position

and about 20 percent of the non-starters were

already in an unfavorable cost position. The

researchers observed that this meant the quan-

tum improvers were becoming better faster and

the non-starters were becoming worse faster. In

other words, the performance gap was growing

and health care fi rms not applying quantum

improver strategies risked being left behind

by organizations that were raising the bar and

redefi ning the playing fi eld. Some important

principles of the quantum improvers:

1. Set non-negotiable goals. Quantum

improvers perform a gap analysis and

determine areas where improvement is

possible and necessary. They determine

where the biggest diff erences are from

established benchmarks and focus on the

vital few areas that will make the biggest

positive diff erence to the organization.

Non-starters receive gap information,

debate it for six months, seek more data,

and agree to talk some more. Quantum

improvers interpret the results as an

immediate call for action. Strategic lead-

ers step up at defi ning moments, keep

the organization on path, and demon-

strate that failure to act is not an option.

2. Focus on key businesses. Health care

organizations cannot be all things to all

people. Organizations have to develop a

“stop doing” list to include those services

that are least profi table and must be elimi-

nated. Doing away with any service is very

hard in health care because no one wants

to eliminate a service that is helping people

even if it is very expensive. Focusing on

those services that support the core mission

and separating fi nancial issues from emo-

tional issues may make the decision to elim-

inate a service easier and more objective.

3. Use a tight–loose–tight approach.

Begin with a tight understanding of the

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 21

Health care leaders require a comprehensive strategic management approach to guiding their organizations through societal and health care industry changes that will occur in the future. Strategic management concepts, activities, and methods presented in this text will prove to be valuable in coping with these changes. In addition, the internal, non-quantifi able benefi ts of strategic manage- ment will aid health care organizations in better integrating functional areas to strategically utilize limited resources and to satisfy the various publics served. Strategic management is the exciting future of effective health care leadership.

What Strategic Management is Not Strategic management should not be regarded as a technique that will provide a “quick fi x” for an organization that has fundamental problems. Quick fi xes for organizations are rare; it often takes years to successfully integrate strategic management into the values and culture of an organization. If strategic manage- ment is regarded as a technique or gimmick, it is doomed to failure. Similarly, strategic management is not just strategic planning or a yearly retreat where the leadership of an organization meets to talk about key issues only to return to “business as usual.” Although retreats can be effective in refocusing management and for generating new thinking, strategic management must be adopted as a

philosophy of leading and managing the organization. Strategic management is not a process of completing paperwork. If strategic

management has reached a point where it has become simply a process of fi ll- ing in endless forms, meeting deadlines, drawing milestone charts, or changing the dates of last year ’s goals and plans, it is not strategic management. Effective strategic management requires little paperwork. It is an attitude, not a series of documents. Similarly, strategic management should not be initiated merely to satisfy a regulatory body ’s or an accrediting agency ’s requirement for a “plan.” In these situations, no commitment is made on the part of key leadership, no participation is expected from those in the organization, and the plan may or may not be implemented. 33

preferred direction for the organization,

then delegate the understanding to a

group of leaders who have fl exibility in

determining how they will achieve the

direction, and fi nally, monitor with tight

accountability to make sure that the

selected approach is working.

Quantum improvers have a culture of

accountability but not a punitive culture. They

are not threat driven. Rather than punish those

who do not achieve, assistance is provided by

upper leadership until the desired results are

accomplished. As Collins notes, great organ-

izations do not have miracle moments of

change; instead they emphasize committed,

controlled, and practical leadership.

Source: Shannon K. Pieper, “Good to Great in Healthcare: How

Some Organizations Are Elevating Their Performance,” Healthcare

Executive 19, no. 3 (2004), pp. 20–26.

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22 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

Strategic management is not a process of simply extending the organization ’s current activities into the future. It is not based solely on a forecast of present trends. Strategic management attempts to identify the issues that will be impor- tant in the future. Health care strategic managers should not simply ask the question, “How will we provide this service in the future?” Rather, they should be asking questions such as, “Should we provide this service in the future?” “What new services will be needed?” “What services are we providing now that are no longer needed?”

A Systems Perspective

The problems facing organizations are so complex that they defy simple solu- tions. Understanding the nature of the health care environment, the relationship of the organization to that environment, and the often-confl icting interests of internal functional departments requires a broad conceptual paradigm. Yet, it is diffi cult to comprehend so many complex and important relationships. Strategic managers have found general systems theory or a systems approach to be a use- ful perspective for organizing strategic thinking.

A system may be defi ned as “a perceived whole whose elements ‘hang together’ because they continually affect each other over time and operate toward a com- mon purpose.” 34 More simply, a system is a set of interrelated elements. Each element connects to every other element, directly or indirectly, and no subset of elements is unrelated to any other subset. Further, a system must have a unity of purpose in the accomplishment of its goals, functions, or desired outputs. 35 Understanding the complex whole through a systems approach:

● aids in identifying and understanding the “big picture”;

● facilitates the identifi cation of major components;

● helps to identify important relationships and provides proper perspective;

● avoids excessive attention to a single part;

● allows for a broad scope solution;

● fosters integration; and

● provides a basis for redesign.

The use of the systems approach requires strategic managers to defi ne the organization in broad terms and to identify the important variables and interre- lationships that will affect decisions. By defi ning systems, strategic managers are able to see the “big picture” in proper perspective and avoid devoting excessive attention to relatively minor aspects of the total system. 36 A systems approach permits strategic managers to concentrate on those aspects of the problem that most deserve attention and allows a more focused attempt at resolution. As Peter Senge has indicated, systems approaches help us to see the total system and how to change the pieces within the system more effectively and intelligently. 37 Perspective 1–5 provides additional insight into the use of systems approaches to see the big picture.

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 23

PERSPECTIVE 1–5

To Manage is to Control – To Control is to Manage

To control means to regulate, guide, or direct. To

manage means to control, handle, or direct.

Therefore, management is control and control is

management. The very act of managing suggests

controlling the behavior or outcome of some

process, program, or plan. Vision, mission, values,

and strategies are types of controls. Similarly,

policies, procedures, rules, and performance

evaluations are clearly organizational controls.

All of these are attempts to focus organizational

eff orts toward a defi ned end. Yet, if these tools

are improperly used, employees may perceive

control to be dominating, overpowering, dictato-

rial, or manipulative.

When processes are poorly managed, control

runs afoul as well. It is interpreted as domina-

tion when management enforces too much

control and manages too closely by controlling

subprocesses or too many details. Management

requires the right touch. If control is too great,

we create hopeless bureaucracy. If control is

too weak, we have a lack of direction causing

diffi culty in accomplishing organizational goals.

When there is too much management (control),

then innovation, creativity, and individual initia-

tive will be stifl ed; when there is too little, chaos

ensues. Management should focus eff orts but

not be dictatorial or manipulative.

Given how easy it is to overdo management

(control), a general rule of thumb is that “less is

best.” Setting direction and empowering people

to make their own decisions on how best to

achieve the vision seems to work. Eff ective man-

agement (control) is essential if organizations

are to renew themselves; however, overmanag-

ing (overcontrolling) can destroy initiative and

be viewed as meddling, often reducing motiva-

tion as well.

Recognizing the importance of a systems framework, health care managers commonly refer to “the health care system” or “the health care delivery system” and strive to develop logical internal organizational systems to deal with the environment. In a similar manner, health care strategic managers must use sys- tems to aid in strategic thinking about the external environment. The community and region may be thought of as an integrated system with each part of the

system (subsystem) providing a unique interdependent contribution.

The Level and Orientation of the Strategy A systems perspective will be required to specify the level of the strategy and the relationship of the strategy to the other strategic management activities. Therefore, the organizational level and orientation should be carefully consid- ered and specifi ed before strategic planning begins. For example, strategies may be developed for large, complex organizations or small, well-focused units. The range of the strategic decisions that are considered in these two organizations is quite different, but both can benefi t from strategic management.

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24 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

A clear specifi cation of the “level” of thinking will determine the type and range of decision to be made in strategic planning. For example, a large inte- grated health care system may develop strategy for a number of levels – a corporate level, a divisional level, an organizational level, and a unit level. As illustrated in Exhibit 1–2 , when considered together these strategic perspectives create a hierarchy of strategies that must be consistent and support one another. Each strategy provides the “means” for accomplishing the “ends” of the next higher level. Thus, the unit level provides the means for accomplishing the ends of the organizational level. The organizational level, in turn, provides the means for accomplishing the ends of the divisional level. Finally, the divisional level is the means to the ends established at the corporate level. As illustrated in Exhibit 1–2 , part of the context for lower-order strategy is provided by the strategic plan- ning of higher-order strategies.

Corporate Level

Strategic Thinking

Strategic Planning

Strategic Thinking

Divisional Level

Strategic Planning

Strategic Thinking Organizational

Level

Strategic Planning

Strategic Thinking

Unit Level

Strategic Planning

Managing Strategic

Momentum

Managing Strategic

Momentum

Managing Strategic

Momentum

Managing Strategic

Momentum

EXHIBIT 1–2 The Link between Levels of Strategic Management

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 25

Trinity Health is the tenth largest health system and fourth largest Catholic health system in the United States and is an example of a health care organi- zation that should develop strategy for all four organizational levels. As of the beginning of 2013, Trinity had over $11.3 billion in assets, $9 billion in revenues, and was comprised of 49 acute-care hospitals, 432 outpatient facilities, 33 long- term care facilities, and numerous home health offi ces and hospice programs located in ten US states. Clearly, strategies should be developed for the corporate level – Trinity Health, for each major division such as Saint Joseph Mercy Health System, for each distinct organization within the division such as Saint Joseph Mercy Saline Hospital, and within the various units (clinical operations).

Corporate-Level Strategy Corporate-level strategies address the ques- tion, “What business(es) should we be in?” Such strategies consider multiple, sometimes unrelated, markets and typically are based on return on investment, market share or potential market share, and system integration. For Trinity Health, clearly the corporate perspective is an important one. The question of “What businesses should we be in?” has resulted in several semi-autonomous “businesses” operating in a number of different markets, including hospitals, outpatient facilities, long-term care, home health, and hospices. Key strategic questions might include, “What other types of businesses should Trinity con- sider?” For example, would wellness or mental health centers be an appropriate strategic move?

Divisional-Level Strategy Divisional-level strategies are more focused and provide direction for a single business type. Divisional strategies are most often concerned with positioning the division to compete. These semi-autonomous organizations are often referred to as SBUs ( strategic business units ) or SSUs ( strategic service units ). Therefore, strategic managers for these units are most concerned with a specifi ed set of competitors and well-defi ned markets (service areas).

For Trinity Health, strategies must be developed for the hospital division, outpatient facilities division, long-term care division, and so on. For the hospital division key strategic questions may include, “How many hospitals are optimal?” or “Which markets should Trinity enter with a new hospital?” This perspective concerns a single business type and its markets. Therefore, it is quite different from the corporate perspective of what businesses Trinity should be in.

Organizational-Level Strategy Within a division, individual organizational units may develop strategies as well. These organizational-level strategies typi- cally concern one organization competing within a specifi c well-defi ned service area. For example, each hospital in Trinity ’s hospital division may develop a strategic plan to address its own particular market conditions. Key strategic questions for this level of strategy may include, “What combination of hospital services is most appropriate for this market?” and “What strategies are the com- petitors using to increase market share?”

Unit-Level Strategy Unit-level strategies support organizational strategies through accomplishing specifi c objectives. Unit operational strategies may be

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26 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

developed within departments of an organization such as clinical operations, marketing, fi nance, information systems, human resources, and so on. Unit strat- egies address two issues. First, they are intended to integrate the various sub- functional activities. Second, they are designed to relate the various functional area policies with any changes in the functional area environment. 38 In addition, linkage strategies are directed toward integrating the functions themselves and creating internal capabilities across functions (for example, quality programs or changing the organization ’s culture).

Strategy Hierarchy Strategic management may be employed independently at any organizational level. However, it is much more effective if there is top- down support and strategies are integrated from one level to the next. For some organizations, of course, there is no corporate or divisional level, such as with a free-standing community hospital or independent long-term care organization. For these organizations the question of scope and perspective and integration of the strategy is much more straightforward.

The Importance of Leadership

Ultimately, strategic decision making for health care organizations is the respon- sibility of top management. The CEO is a strategic manager with the pre-eminent responsibility for positioning the organization for the future. The leader must be able to inspire, organize, and implement effective pursuit of a vision and maintain it even when sacrifi ces are required. 39 As a result, the leader must have an ability to identify what needs to be done today and what can wait. They prioritize constantly; aware that wars are lost by fi ghting on too many fronts. They know the key messages to communicate from day to day, from audience to audience. 40 If the CEO does not fully understand or faithfully support strategic management, it will not happen.

Leadership Roles throughout the Organization In the past, strategy development was primarily a staff activity. The planning staff would create the strategy and submit it for approval to top management. This process resulted in plans that were often unrealistic, did not fully consider the realities and resources of the divisions or departments, and separated planning from leadership.

Over the past two decades, many large formal planning staffs have been dissolved as organizations learned that strategy development cannot take place in relative isolation. Therefore, the development of the strategy has become the responsibility of key managers. The coordination and facilitation of strategic planning typically may be designated as the responsibility of a sin- gle key manager (often the CEO), but the entire leadership team is responsible for strategy development and its management. The rationale underlying this approach is that no one is more in touch with the external environment (regu- lations, technology, competition, social change, and so on) than the managers who must deal with it every day and lead change. The leadership team must

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 27

coordinate the organization ’s overall strategy and facilitate strategic thinking throughout the organization. As a result, the organization ’s key top managers act as an extension of the CEO to ensure that an organized and used planning process ensues. 41

Lessons for Health Care Managers

Strategic management is an often complex and diffi cult task. A model of stra- tegic management provides a useful framework or intellectual map for concep- tualizing and developing strategies for an organization. Strategic management includes strategic thinking, strategic planning, and managing strategic momen- tum. In reality, these elements are blended together as the strategy is formed and reformed through leadership, intuition, and organizational learning. Indeed, implementing the strategy may actually create an entirely new, unintended strategy.

The concept of strategic management has been successfully used by business organizations, the military, and in government agencies; health care managers are fi nding it essential for their organizations as well. The strategic management model presented and discussed in this chapter may be applied to a variety of types of health care organizations operating in dramatically different environ- ments, is useful for both large and small organizations, and facilitates strategic thinking at all levels of the organization.

The strategic planning portion of the model incorporates situational analysis, strategy formulation, and strategy implementation. The strategic thinking activi- ties within situational analysis combine to infl uence strategy formulation.

Strategy formulation in turn affects planning the implementation. Finally, the strategy must be managed, evaluated, and modifi ed as needed. Managing strate- gic momentum is an iterative process that may incorporate new understandings of the situation, change the fundamental strategy, or modify strategy implemen- tation. Managing strategic momentum essentially continues strategic thinking and strategic planning.

The strategic thinking map presented in this text is designed to provide the essential logic of the activities involved in strategic management and therefore is based on both analytical (rational) as well as emergent (learning) approaches for understanding strategy making in organizations. The analytical model provides an excellent starting point for understanding the concept of strategy and a foun- dation for comparing and contrasting strategies. However, the strategic thinking map does not perfectly represent reality and must not be applied blindly or with the belief that “life always works that way.” Strategic management is not always a structured, well-thought-out exercise. In reality, thought does not always precede action, perfect information concerning the environment and organization never exists, and rationality and logic are not always superior to intuition and luck. Sometimes organizations “do” before they “know.” For instance, the intended strategies are often not the realized strategies. Sometimes managers are able to just “muddle through.” Or, managers may have a broad master plan or logic underlying strategic decisions, but, because of the complexity of the external

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28 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

and internal environments, incremental adjustments or guided evolution is the best they can do. 45

Managers must realize that, once introduced, strategies are subject to a vari- ety of forces, both within and outside the organization. Sometimes we learn by doing. Yet, without a plan (a map) it is diffi cult to start the journey, diffi cult to create any type of momentum for the organization, and diffi cult to have consist- ent decision making. Thus, strategic managers begin with the most rational plan that can be developed and continue to engage in strategic thinking. Effective strategic managers become adept at “freezing” and “unfreezing” their thinking and strategic plans as the situation changes.

Health Care Manager ’s Bookshelf

H. Igor Ansoff, Corporate Strategy: An Analytical Approach to Business Policy for Growth and Expansion (New York: McGraw-Hill, 1965)

Henry Mintzberg declared that the publication

of Corporate Strategy: An Analytical Approach

to Business Policy for Growth and Expansion by

H. Igor Ansoff was a major event in the world

of management. The book “represented a kind

of crescendo in the development of strategic

planning theory, off ering a degree of elaboration

seldom attempted since.” 1

Corporate Strategy is considered by many to

be the fi rst book devoted exclusively to business

strategy. 2 Ansoff uses the term strategic to mean

“pertaining to the relationship between the fi rm

[organization] and its environment.” 3 Hussey

noted that with the publication of Corporate

Strategy “managers were off ered, for the fi rst

time, a book which took them through all the

steps of a formal approach to strategic decision

making” and provided a number of analytical

tools for aiding strategic thinking. 4

Ansoff introduced the concept of synergy or

the familiar business rule of 2 + 2 = 5. Gilmore

and Brandenburg acknowledge their debt to

Ansoff for introducing this important concept,

which Ansoff developed while employed at

Lockheed Aircraft Corporation and continues to

be an essential part of much strategy formula-

tion. 5 Synergy is a critical concept as strate-

gists evaluate the fi nancial wisdom of entering

into strategies such as vertical integration and

diff erentiation.

Ansoff argued that an organization can-

not defi ne itself as simply being in the health

care, transportation, or energy business. These

defi nitions are too broad to defi ne the common

thread. The common thread is the relationship

between present and future services, prod-

ucts, and markets which “enable outsiders to

perceive where the organization is heading,

and inside management to give it guidance”

(p. 105). It was with regard to this common

thread that Ansoff developed and introduced

the product–market matrix. This matrix became

so popular that even 30 years later Ansoff

received a request to reprint the matrix every

three or four months. 6

Ansoff ’s Corporate Strategy is an impor-

tant milestone in the evolution of strategic

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 29

management. Strategic managers will appre-

ciate the care with which Ansoff related his

innovative concepts to leading organizations.

Melvin Anshen emphasizes the value the book

has to managers and scholars because it “identi-

fi es and precisely orders the discrete, sequential

building blocks of logical analysis as applied to

the design of planning for strategy growth.” 7

Walter Schaffi r underscored the importance of

Corporate Strategy stating that it is “one of the

fi rst attempts to off er a professional, techni-

cal, and comprehensive approach to the prob-

lem of selecting long-range direction” for an

organization. 8

Perhaps the best summary of Ansoff ’s con-

tributions is given by one who knew him well.

Gen-Ichi Nakamura stated that Ansoff ’s con-

struction of a coherent and dynamic conceptual

framework for strategic management could be

described as “Ansoff ’s mountains.” He suggests

that people “try to climb the Ansoff mountains.

At the outset, you may fi nd it diffi cult and

tiresome. After some trial, however, you will

fi nd your eff ort most enjoyable, enriching, and

rewarding.” 9

REFERENCES

1. Henry Mintzberg, The Rise and Fall of Strategic

Planning (New York: Free Press, 1994), p. 43.

2. H. Igor Ansoff , Corporate Strategy: An Analytical

Approach to Business Policy for Growth and

Expansion (New York: McGraw-Hill, 1965).

3. Ibid. p. 5.

4. David Hussey, “Igor Ansoff ’s Continuing

Contribution to Strategic Management,”

Strategic Change 8, no. 7 (1999), p. 379.

5. E. E. Gilmore and R. G. Brandenburg, “Anatomy

of Corporate Planning,” Harvard Business Review

40, no. 6 (1962).

6. H. Igor Ansoff , “A Profi le in Intellectual Growth,”

in Arthur G. Bedeian (ed.), Management

Laureates: A Collection of Autobiographical

Essays (Greenwich, CN: JAI Press, 1992), p. 14.

7. Melvin Anshen, “Corporate Strategy: A Review,”

Journal of Business 39, no. 3 (1965), pp. 426–427.

8. Walter B. Schaffi r, “Corporate Strategy,”

Management Review 54, no. 4 (1965),

pp. 78–79.

9. G. I. Nakamura, quoted in Hussey (1999),

p. 387.

KEY TERMS AND CONCEPTS IN STRATEGIC MANAGEMENT

Analytical/Rational Approach

Corporate-Level Strategy

Directional Strategies

Divisional-Level Strategy

Emergent Strategy

Health Policy

Implementation Plans

Managing Strategic Momentum

Map/Compass

Organizational-Level Strategy

Rational Approach

Situational Analysis

Strategic Business Unit (SBU)

Strategic Management

Strategic Planning

Strategic Service Unit (SSU)

Strategic Thinking

Strategic Thinking Map

Strategy

Strategy Formulation

Systems Approach

Unit-Level Strategies

Unrealized Strategies

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30 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

Questions for Class Discussion

1. Explain why strategic management has become crucial in today ’s dynamic health care environment.

2. What is the rationale for health care organizations’ adoption of strategic management?

3. Trace the evolution of strategic management. Have the objectives of strategic manage- ment changed dramatically over its development?

4. How is strategic management different from health policy?

5. Compare and contrast the analytical view of strategic management with the emergent, learning approach. Which is most appropriate for health care managers?

6. Why are conceptual models of management processes useful for practicing managers?

7. What is a strategic thinking map? How are strategic thinking maps useful? What are their limitations?

8. What are the major activities of strategic management? How are they linked together?

9. Differentiate among the terms strategic management, strategic thinking, strategic planning, and managing strategic momentum.

10. Who should be doing strategic thinking? Strategic planning? Managing strategic momentum?

11. Is strategic thinking enough? Why do we engage in strategic planning? What are the elements of strategic planning?

12. What is meant by realized strategies? How can strategies be realized if they were never intended?

13. What can change well-thought-out strategies that were developed using all the steps in strategic planning?

14. Explain and illustrate the possible benefi ts of strategic management. What types of health care institutions may benefi t most from strategic management?

15. Why is a “systems approach” helpful to strategic managers?

16. At what organizational level(s) may a strategy be developed? If at more than one level, how are these levels linked by the planning process?

17. How has the role of the strategic planner changed over the past several decades? What new skills will be essential for the strategic planner?

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CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT 31

Notes 1. Jeffrey Bracker, “The Historical Development of

the Strategic Management Concept,” Academy of

Management Review 5, no. 2 (1980), pp. 219–224.

2. Ibid.

3. Bruce D. Henderson, “The Origin of Strategy,” Harvard

Business Review 67, no. 6 (November–December 1989),

p. 142. See also Peer C. Fiss and Edward J. Zajac, “The

Symbolic Management of Strategic Change: Sensegiving

via Framing and Decoupling,” Academy of Management

Journal 49, no. 6 (2006), pp. 1187–1190.

4. Chris Zook, “Finding Your Next Core Business,”

Harvard Business Review 85, no. 4 (April 2007), p. 75.

5. Bracker, “The Historical Development of the Strategic

Management Concept,” pp. 219–224.

6. Margarete Arndt and Barbara Bigelow, “The Transfer

of Business Practices into Hospitals: History and

Implications,” in John D. Blair, Myron D. Fottler,

and Grant T. Savage (eds) Advances in Health Care

Management (New York: Elsevier Science, 2000), pp.

339–368.

7. Peter M. Ginter and Linda E. Swayne, “Moving Toward

Strategic Planning Unique to Healthcare,” Frontiers of

Health Services Management 23, no. 2 (winter 2006),

pp. 33–34.

8. Ernest L. Stebbins and Kathleen N. Williams, “History and

Background of Health Planning in the United States,” in

William A. Reinke (ed.), Health Planning: Qualitative

Aspects and Quantitative Techniques (Baltimore: Johns

Hopkins University, School of Hygiene and Public

Health, Department of International Health, 1972), p. 3.

9. Henry Mintzberg, “The Design School: Reconsidering

the Basic Premises of Strategic Management,” Strategic

Management Journal 11, no. 3 (1990), pp. 171–195.

10. Henry Mintzberg, The Rise and Fall of Strategic

Planning: Reconceiving Roles for Planning, Plans,

Planners (New York: Free Press, 1994).

11. David K. Hurst, Crisis and Renewal: Meeting the

Challenge of Organizational Change (Boston: Harvard

Business School Press, 1995), pp. 167–168.

12. Ibid. See also Eric Dane and Michael G. Pratt, “Exploring

Intuition and Its Role in Managerial Decision Making,”

Academy of Management Review 32, no. 1 (2007), p. 49.

13. Rosabeth Moss Kanter, “Strategy as Improvisational

Theater,” MIT Sloan Management Review (winter 2002),

p. 76.

14. Ian H. Wilson, “The 5 Compasses of Strategic

Leadership,” Strategy & Leadership 24, no. 4 (1996),

pp. 26–31 and Dusya Vera and Mary Crossan, “Strategic

Leadership and Organizational Learning,” Academy of

Management Review 29, no. 2 (2004), pp. 222–240.

15. Robert S. Kaplan and David P. Norton, “Having Trouble

with Your Strategy? Then Map It,” Harvard Business

Review 78, no. 5 (September–October 2000), pp. 167–

176. See also Robert S. Kaplan and David P. Norton,

Strategy Maps: Converting Intangible Assets into

Tangible Outcomes (Boston, MA: Harvard Business

School Press, 2004).

16. Hurst, Crisis and Renewal , p. 7.

17. Peter M. Senge, The Fifth Discipline: The Art & Practice

of The Learning Organization (New York: Currency

Doubleday, 1990), pp. 239–240.

18. Ronald A. Heifetz and Marty Linsky, “A Survival Guide

for Leaders,” Harvard Business Review ( June 2002), pp.

65–74.

19. Keven Kelly, “Roller Coaster Leadership,” Business

Strategy Review 18, no. 1 (spring 2007), p. 26.

20. James M. Kouzes and Barry Z. Posner, The Leadership

Challenge: How to Keep Getting Extraordinary Things

Done in Organizations (San Francisco: Jossey-Bass

Publishers, 1995), p. 93.

21. Kathleen K. Reardon, “Courage as a Skill,” Harvard

Business Review 85, no. 1 ( January 2007), p. 63.

22. Kouzes and Posner, The Leadership Challenge , p. 30.

23. Alan M. Zuckerman, “Advancing the State of the Art

in Healthcare Strategic Planning,” Frontiers of Health

Services Management 23, no. 2 (winter 2006), p. 7.

24. Alan Weiss, Our Emperors Have No Clothes (Franklin

Lakes, NJ: Career Press, 1995), p. 20.

25. Michael A. Mische, Strategic Renewal: Becoming

a High-Performance Organization (Upper Saddle

River, NJ: Prentice Hall, 2001), p. 21 and Cynthia A.

Lengnick-Hall and Tammy E. Beck, “Adaptive Fit Versus

Robust Transformation: How Organizations Respond

to Environmental Change,” Journal of Management 31,

no. 5 (2005), p. 739.

26. Henry Mintzberg, Mintzberg on Management (New

York: Free Press, 1989), p. 41.

27. John C. Camillus, “Reinventing Strategic Planning,”

Strategy & Leadership 24, no. 3 (1996), pp. 6–12. See

also Clayton M. Christensen, Scott D. Anthony, and

Eric A. Roth, Seeing What’s Next: Using Theories of

Innovation to Predict Industry Change (Boston, MA:

Harvard Business School Press, 2004).

28. Jane Linder, “Paying the Personal Price for Performance,”

Strategy & Leadership 28, no. 2 (March–April 2000), pp.

22–25.

29. Mintzberg, “Patterns in Strategy Formation,” p. 946.

30. Max DePree, Leadership Is An Art (New York:

Doubleday, 1989), p. 14.

31. Craig R. Hickman, Mind of a Manager, Soul of a Leader

(New York: John Wiley & Sons, 1992), p. 261.

32. After almost four decades of research, the effects of

strategic planning on an organization ’s performance

are still unclear. Some studies have found signifi cant

benefi ts from planning, although others have found

no relationship, or even small negative effects. For

an extensive survey of the strategic planning/fi nan-

cial performance literature, see Lawrence C. Rhyne,

“The Relationship of Strategic Planning to Financial

Performance,” Strategic Management Journal 7, no. 5

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32 STRATEGIC MANAGEMENT OF HEALTH CARE ORGANIZATIONS

(September–October 1986), pp. 423–436 and Brian K.

Boyd, “Strategic Planning and Financial Performance: A

Meta-analytic Review,” Journal of Management Studies

28, no. 4 ( July 1991), pp. 353–374.

33. Jim Begun and Kathleen B. Heatwole, “Strategic

Cycling: Shaking Complacency in Healthcare Strategic

Planning,” Journal of Healthcare Management 44, no. 5

(September–October 1999), pp. 339–351.

34. Peter M. Senge, Charlotte Roberts, Richard B. Ross,

Bryan J. Smith, and Art Kleiner, The Fifth Discipline

Fieldbook: Strategies and Tools for Building A Learning

Organization (New York: Currency Doubleday, 1994),

p. 90.

35. Joseph K. H. Tan, Health Management Information

Systems: Methods and Practical Applications , 2nd edn

(Gaithersburg, MD: Aspen Publishers, 2001), p. 25.

36. Michael P. Dumler and Steven J. Skinner, A Primer for

Management (Mason, OH: Thomson South-Western,

2005), pp. A10–A11.

37. Senge, The Fifth Discipline , p. 7.

38. Dan E. Schendel and Charles W. Hofer, “Introduction,”

in D. E. Schendel and C. W. Hofer (eds), Strategic

Management: A New View of Business Policy and

Planning (Boston: Little, Brown, 1979), p. 12.

39. Russell L. Ackoff, “Transformational Leadership,”

Strategy & Leadership 27, no. 1 (1999), pp. 20–25.

40. Kelly, “Roller Coaster Leadership,” p. 26.

41. Donald L. Bates and John E. Dillard Jr., “Wanted: A

Strategic Planner for the 1990s,” Journal of General

Management 18, no. 1 (1992), pp. 51–62.

42. Henry Mintzberg, “The Fall and Rise of Strategic

Planning,” Harvard Business Review 72, no. 1 ( January–

February 1994), pp. 107–114.

43. Ibid.

44. Horst Bergmann, Kathleen Hurson, and Darlene Russ-

Eft, “Introducing a Grass-roots Model of Leadership,”

Strategy & Leadership 27, no. 6 (1999), pp. 15–20.

45. Bjorn Lovas and Sumantra Ghoshal, “Strategy as

Guided Evolution,” Strategic Management Journal 21,

no. 9 (2000), pp. 875–896.

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