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Chapter 12: Organizational Structure and Strategy

Strategic Healthcare Management: Planning and Execution

by Stephen L. Walston

Learning Objectives

Understand the differences among corporate, business, and functional strategies.

Learn the primary strategic functions of a corporate office.

Know what is meant by span of control.

Be able to discuss the benefits and problems of separating an organization’s functions into separate departments.

Perceive the advantages and disadvantages of using different organizational structural forms.

Recognize the contexts in which different organizational structures might work best.

Comprehend the importance of centralization and decentralization of decision making and its relationship to organizational structure.

Importance of Organizational Structure

“The structure of . . . institutions plays a crucial role in the formulation of strategy and its adaptability to actual conditions. The form . . . affects the ability of decisionmakers to analyze and interpret the external environment.”

—Murray, Knox, and Bernstein (1994, 19)

Example: corporate Structure of a Large organization

Strategic Level

Corporate

Business Unit

Functional Unit

Agfa Corporate Offices

Agfa Graphics

Agfa HealthCare

Agfa Specialty Products

IT Solutions

Imaging Systems

Primary Concerns of Corporations

Allocating capital across business units

Deciding which businesses to compete in

Determining how to integrate and manage those businesses

Strategic Business Units

Responsible for directing a division, product line, or other revenue (profit) or cost center

Concerned with developing and sustaining the market advantage of the unit’s goods and services

Generally deem the issues of integration and coordination across the corporation secondary in nature

Deal with positioning the business in its market, anticipating changes in demand and technologies, and influencing the nature of market competition

Functional Units

May consist of operating divisions, product lines, and/or departments

Concerned with business processes and value chains

Use the resources allocated to them to maximize achievement of the corporation’s mission

May work to better integrate with marketing, finance, human resources, and research to promote their specific products and services and improve business outcomes

Business Unit

Functional Unit

Corporate

Strategic Direction

Feedback and Results

Key Strategic Functions

Allocates capital, chooses businesses

Positions business

Maximizes value chain and processes

Strategic Functions by Organizational Level

Origin of Modern Organizations And Their Specialized Structures

Almost two thousand years ago, Roman armies formalized their ranks. Armies were divided into legions—ten cohorts of 5,280 men—and legions were subdivided into centuria of 80 men and contubernia of 8 men. Soldiers had distinct functions and skills; roles included combat medic, heavy and light infantry soldier, archer, artillery soldier, and cavalryman (Rodgers and Dodge 2005).

Tensions Between Integration and Differentiation

Efforts to gain synergies through integration of organizational functions often seem antagonistic and contrary to efforts to improve quality and gain economies of scale through differentiation.

When duties and tasks are combined (integration) to facilitate coordination, silos are broken down and multiple job types are combined into one unit.

As the number of dissimilar personnel in one area increases, synergies may increase.

As different positions are grouped together, the overall skill level and efficiency may deteriorate. Likewise, coordination of services becomes much more difficult.

Organizational Structure In Healthcare?

“During a seminar with a group of health care administrators, we asked the participants to diagram the cycle of service that ensues when a patient is wheeled off for, and eventually brought back from, a series of medical tests. After several minutes of discussion about the place of various aides, nurses, doctors, and lab technicians in the cycle, the task was completed. As they sat admiring their handiwork, one of the administrators said aloud—as much to himself as to the group—‘My goodness! No one is in charge.’ His insight proved to be a valuable one that we have since seen in other organizations. His explanation went like this: Our hospital is organized and managed by professional specialty—by functions like nursing, housekeeping, security, pharmacy, and so on. As a result, no single person or group is really accountable for the overall success and quality of the patient’s experience. The aides are accountable for a part of the experience, the nurses for another, the lab technicians for another, and so on. There are a lot of people accountable for a part of the service cycle, but no one has personal accountability for an entire cycle of service” (Albrecht and Zemke 2008, 38).

Span of Control

This is the number of subordinates that report to a supervisor.

Narrow spans of control generally have multiple layers of management, and communication is slow between managers at the top and lower-level employees.

Tall hierarchy may be more expensive to operate than a flatter one because it includes a greater number of mid-managers.

Management literature has recommended a span of control of no more than seven or eight employees. However, the span of control averages 11 in service industries and 16 in healthcare (Davison 2003).

Characteristics of Flat Organizations with Large Spans of Control

Focus on team-based management

Emphasis on customer satisfaction

Need for rapid decision making

Large size

Effective use of IT

Culture of trust and excellent delegation skills

Extensive training, culture of innovation, and excellent job skills

Low job complexity

Similar job types

Close geographic presence of subordinates

Functional Organization

Structures departments by common tasks, services, or roles

Executives

Finance

R & D

Marketing

Manufacturing

Functional Organization (cont.)

The main advantages are a higher level of expertise and the potential for achieving economies of scale.

The greatest disadvantage is the potential for poor communication and coordination among units. Silos are easily formed and competition may arise between departments, leading to inefficiencies, conflicting goals, and poor quality.

The problems prompted by a functional structure are heightened in healthcare by its many professions, such as physicians, nurses, pharmacists, and dietitians.

Multidivisional Organization

Broken down into a number of smaller businesses or profit centers

Divisions generally created on the basis of geography and products

Divisional leaders usually given sufficient autonomy to manage and organize their business units

Divisional autonomy encourages innovation and quicker response to localized needs, keeps corporate managers from becoming bogged down in the minutiae of divisional operations, and gives them time to focus on corporate strategic direction.

Division A

Finance

R & D

Marketing

Manufacturing

Corporation

Finance

Marketing

Manufacturing

R & D

Division B

Division C

Finance

Marketing

Manufacturing

R & D

Multidivisional Organization (cont.)

Advantages

Adapts products/processes to local conditions

Facilitates unit evaluation of common outputs

Assists in improving management decision making, especially if the products and services across divisions differ significantly in their customers and focus

Disadvantages

Intercompany rivalry create barriers to cooperation and impede spread of innovation

Problems with transfer pricing

Duplication of functions

Healthcare Multidivisional Organization

Healthcare providers have organized multidivisional structures around service lines, such as cardiology, orthopedics, pediatrics, neurology, and women’s services. Separate hospitals have been created for heart conditions (cardiology), spine surgery, and sports medicine, among other specialties.

Under these structures, managers have incentives to adapt their facilities and resources to best meet the needs of their distinct customers.

Matrix Organization

It organizes employees into functional and project/product groups.

Personnel are assigned to a project or product and report to that project’s manager as well as directly to their functional department.

Factor impacting the success or failure of the matrix structure is the amount of authority given to the project/product manager.

CEO

R & D

Purchasing

Marketing

Project A Manager

Project B Manager

Engineering

Project Team B

Project Team A

Matrix Organization (cont.)

Advantage

Improves coordination and communication that break down silos that can form in functional units.

Disadvantages

Two bosses may have divergent goals, and this may create power struggles.

Poorly implemented matrix reporting relationships can misalign goals and mismatch authority and responsibility. Multiple reporting relationships can result in ambiguity and conflict for employees.

Advantages and Disadvantages of Functional, Multidivisional, and Matrix Structures

Refer to Exhibit 12.8

Comparison of Organizational Structures

Many organizations actually use a hybrid structure best suited to their strategies, missions, and markets.

The locus of decision making or authority affects the success or failure of any structure.

A high degree of centralized decision making requires increased information flow to top managers, which can accentuate information overload.

Future Structures

The Affordable Care Act (ACA) introduces many changes to the way healthcare has been provided and may significantly affect the organizational structures used to govern its provision.

To meet the mandates and challenges posed by the ACA, organizational structures of the future will have to be more inclusive and expand to have the authority and ability to better manage care.

Chapter Questions

How does organizational structure influence the strategies an organization develops?

Why is there no optimal structure?

What factors affect the successful use of functional, multidivisional, and matrix structures?

Could the three levels of an organization—corporate, business unit, and functional unit—each have a different organizational structure? Why or why not?

What are the corporate office’s key concerns in creating and implementing strategy? Why

What factors could determine the appropriate span of a manager’s control?

Could a matrix structure be used across a large corporate organization? Why or why not?

What are the advantages and disadvantages of using a functional structure?

How could a large, academic hospital use a multidivisional structure?

How can transfer pricing affect the successful use of a multidivisional structure?

Why might organizations use hybrid organizational structures? How might an organization use part of each of the three structures discussed in this chapter?

How could an ACO use a matrix structure to coordinate care?

Chapter Case

Read the case “Matrix or Mess” at the end of the chapter.

Review the questions after the case.

Chapter Assignment

Participative management has become a popular concept in business. Write a two-page paper on how the components of organizational structure encourage or discourage employee participation.

Matrix structures have been used in academic medical centers to coordinate medical, academic, and administrative functions. What challenges do you think this two-boss structure creates in this healthcare setting? What could be done to overcome those challenges?

Search online for two ACOs. What organizational structures do they employ?