Strategies & Alternatives

Chapter 7 Evaluation of Alternatives and Strategic Choice

Why Evaluation of Alternatives and Strategic Choice Are Important

The quote by Alvin Toffler is particularly relevant to those making strategic deci- sions. Quantitative as well as qualitative data help inform strategic decisions; how- ever, the most important decisions made in organizations, the strategic choices, are fundamentally judgments – informed opinions about what the data actually means.

Toffler further suggests that although managers may collect and analyze all the data they can to support the decision-making process, they still have to question underlying assumptions, see the larger context, and use their best judgment. For instance, one set of statistical data can often be used to make a case for either side of an issue. Similarly, there really are no facts, just interpretations. The same set of “facts”

“You can use all the quantitative data you can get but you still have to distrust it and use your own intelligence and judgment.”

—Alvin ToFFler, AMericAn AuThor AnD FuTuriST

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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260 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

may mean very different things depending on the interpretation – interpretation that is always colored by beliefs, values, and biases. Finally, by the time hard-data-driven information reaches the strategic decision maker, it is likely a day late and has been organized, summarized, sterilized, or otherwise manipulated by someone.

Many times a decision has to be made by the strategist despite a lack of data indicating that one alternative is clearly superior to another alternative. in these commonly occurring cases, no substitute exists that is better than using one’s intelligence, experience, and judgment. What will help strategic manag- ers make improved judgments are innovative ways to organize the data so that it better reveals its implications and, thus, better informs judgment and opinion. Data organization may be accomplished by arranging information into tables and strategic “thinking maps.” These constructs aid strategic man- agers by enabling them to see relationships, discern trends, derive meaning from conflicting data, brainstorm alternatives, and so on. it is not so much the data itself that guides decisions, rather the organization and presentation of the data informs judgment.

use concepts in this chapter to organize data and make judgments for better strategic choices!

Strategic Management Competency After completing this chapter you will be able to develop a comprehensive strat- egy for a health care organization.

A Process for the Evaluation of the Alternatives

Fundamental to strategic management is the need to change strategies over time.1 There are several analytical frameworks or maps that may be used to guide strate- gic thinking concerning the appropriate strategic alternatives for an organization.

learning objectives

After completing the chapter you will be able to: 1. Explain the rationale underlying the strategic thinking maps used to evaluate strate-

gic alternatives. 2. Discuss the methods for the evaluation of adaptive strategic alternatives for a health

care organization. 3. Discuss the external conditions and internal resources, competencies, and capabili-

ties most suited for the market entry/exit strategic alternatives. 4. Discuss the external conditions and internal resources, competencies, and capabili-

ties appropriate for the strategic posture and generic positioning alternatives. 5. Articulate the role of the service delivery and support strategies.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 261

These strategic thinking maps incorporate the results of external and internal analyses, as well as the directional strategies. contemplative strategic thinking to understand the internal requirements and external conditions of strategic alterna- tives is essential to assure a coherent and integrated strategy. exhibit 7–1 provides an organized five-step process for using the analytical strategic thinking maps to develop a complete strategy for a health care organization.

EXHIBIT 7–1 Process for Strategy Formulation

Step 1 – Link Strategy with Situational Analysis

Step 2 – Evaluate and Select Adaptive Strategies

Step 3 – Evaluate and Select Market Entry/Exit Strategies

Step 4 – Evaluate and Select Competitive Strategies

Step 5 – Synthesize and Identify Implications of Strategy Choices – Strategy Map

Although the evaluation of strategic thinking maps introduced in the process for strategy formulation fine-tunes the manager’s perspective and organizes thinking, ultimately, the strategic manager must make the decision. Strategic man- agers need to understand the risks, make judgments, and commit the organization to some course of action. Therefore, the analytical strategic thinking maps cannot be used to obtain “answers,” but they enable strategists to gain perspective and insight. often no one right answer emerges. As management philosopher and author Peter Drucker has pointed out, “it is a choice between alternatives. it is rarely a choice between right and wrong. it is at best a choice between ‘almost right’ and ‘probably wrong’ – but much more often a choice between two courses of action neither of which is probably more nearly right than the other.”2 Strategic thinking maps help to structure the thought processes of decision makers. it is important that managers think strategically and, almost as important, have

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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262 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

some imagination and employ sound judgment. To have the proper perspective, strategic managers must be involved with customers, vendors, and employees in the organization, talking to people to gain a real feel for the culture, competitive advantage, and organizational opportunities and threats.

Step 1: Link Strategy with Situational Analysis Situational analysis – external, service area competitor, and internal analyses, as well as the development of the directional strategies – provides a critical foun- dation for the development of strategy. conclusions of these analyses are criti- cal inputs to the analysis processes and must “drive” the strategy alternatives decisions. in fact, a final test of the strategic choices, as demonstrated by the checklist in exhibit 7–2, is that the strategies selected by an organization address external issues, draw on competitive advantages or fix competitive disadvan- tages, keep the organization within the parameters of the mission and values, move the organization toward the vision, and make progress toward achieving one or more of its strategic goals. This checklist procedure is a significant part of the strategic thinking process and helps to assure consistency of analysis and action. each selected strategy should be tested against these questions. Strategies that do not have a “yes” in each column should be subject to additional scrutiny and justification.

EXHIBIT 7–2 Checklist for Linking Strategic Alternatives with Situational Analysis

Strategic Alternative

Addresses an External Issue?

Draws on a Competitive Advantage or Fixes a Competitive Disadvantage?

Fits with Mission, Values?

Moves the Organization Toward the Vision?

Achieves One or More Strategic Goals?

Strategy 1 Yes Yes Yes Yes Yes

Strategy 2 Yes Yes Yes Yes Yes

Strategy 3 Yes Yes Yes Yes Yes

Step 2: Evaluate and Select Adaptive Strategies As discussed throughout chapter 6, once the directional strategies have been developed, consideration is given to the adaptive strategies. The adaptive strat- egies are central to strategy formulation and are the broadest interpretation of the directional strategies. This level of strategic decision making specifies whether the organization wants to grow (expansion of scope), become smaller (reduction of scope), or remain about the same (maintenance of scope). once the decision has been made to grow, reduce, or maintain scope, the methods to accomplish expan- sion, reduction, or maintenance of scope (diversification, divestiture, enhance- ment, and so on) must be formulated.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 263

re-evaluation of the adaptive strategies is an ongoing activity as new external forces emerge and provide fresh opportunities or threaten the viability of the current strategy. For example, Academic health centers (Ahcs), although able to maintain their unique research focus for decades, have increasingly felt the pressures of change. Ahcs, accustomed to having the most difficult cases referred to them for treatment, have not been a major part of “managed care” but rather dealt with these high-cost patients to further their unique mission. Ahcs are preparing to deal with an array of complicated issues as they look to the future. recently the Association of Academic health centers (AAhc) identified 10 “dis- rupters” its members must deal with in the future. These are: changing market forces, consumer empowerment, disease patterns, entrepreneurism, globalization, politics and policy, population demographics, science, societal needs and values, and technology.3

Several constructs help strategic managers to think about adaptive strategic decisions. As expressed previously, these constructs help to show relationships of the organization to its markets and competitors; they do not make the deci- sion. however, some methods are available to evaluate the adaptive strategies including:

● SWoT Analysis – Strengths, Weaknesses, opportunities, and Threats. ● external/internal Strategy Matrix. ● Product life cycle (Plc) Analysis. ● Boston consulting Group (BcG) Portfolio Analysis. ● extended Portfolio Matrix Analysis. ● Strategic Position and Action evaluation (SPAce). ● Program evaluation.

SWOT: Strengths, Weaknesses, Opportunities, Threats Analysis SWoT (strengths, weaknesses, opportunities, and threats) analysis has been popular as a way to display pertinent external issues and internal strengths and weaknesses. SWOT analysis is a systematic investigation to consider an organization’s internal (strengths and weaknesses) and external (opportunities and threats) issues and display them in a two-by-two matrix. SWoT is one of the most widely used stra- tegic planning tools. one study noted that SWoT is a part of virtually every case analysis used in the teaching of strategic management and  business policy.4 A SWoT analysis is typically displayed as illustrated in exhibit 7–3 and developed in brainstorming sessions of participants familiar with the organization and its situation. SWoT analysis can provide an initial overview of an organization’s external and internal situation.

Methods for identifying an organization’s opportunities and threats were dis- cussed in chapter 2, including trend identification and extrapolation, solicitation of expert opinion, dialectic inquiry, stakeholder analysis, scenario writing, and future studies. A method for determining organizational strengths and weak- nesses was discussed in chapter 4 and focused on identifying resources, com- petencies, and capabilities found in the organization’s value chain.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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264 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

A SWoT analysis is easy to develop; however, it does not provide much insight into what strategy decisions might result from the list of strengths, weaknesses, opportunities, and threats. it has even been suggested that in certain circum- stances, such as moving from a deregulated to a highly regulated (or vice versa) health system, where the future is uncertain, SWoT may be less applicable.5 As discussed in chapter 2, the designation of external issues as opportunities or threats is often arbitrary, and opportunities are commonly presented as strategic alternatives rather than independent external issues affecting the organization; however, those strategists that are able to identify true external opportunities (events/issues occurring in the external environment over which no one has control) prior to or earlier than others, have the possibility of seizing an issue and turning it into a competitive advantage. Additionally, it is important to note that external issues may be both opportunities and threats. Furthermore, SWoT analysis has no provision for prioritizing or evaluating the internal strengths or weaknesses as being competitively relevant – competitive advantages or competi- tive disadvantages. As a result, SWoT analysis should only be used as an initial overview of the organization’s situation or to provide a foundation for more in- depth analysis.

External/Internal Strategy Matrix rather than just listing strengths, weak- nesses, opportunities, and threats, decision makers should match the external issues identified in the general environment, health care system, and service area as discussed in chapters 2 and 3 with long-term and short-term competi- tive advantages and disadvantages (discussed in chapter 4). An external/internal strategy matrix juxtaposes external issues with internal competitive advantages and disadvantages. exhibit 7–4 shows such a strategic thinking map that is useful

EXHIBIT 7–3 SWOT Analysis

1. 2. 3. 4. 5. 6. 7. 8.

Strengths

Internal Analysis

External Analysis

1. 2. 3. 4. 5. 6. 7. 8.

Weaknesses

1. 2. 3. 4. 5. 6. 7. 8.

Opportunities 1. 2. 3. 4. 5. 6. 7. 8.

Threats

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 265

EXHIBIT 7–4 External/Internal Strategy Matrix EXTERNAL ISSUES

General Environmental Issues 1. Population over 65

expanding

2. Economy continues to grow

3. Decreasing regulations of business

Health Care System Issues 1. Declining

reimbursements

2. Industry continues to grow

3. Lack of trained health care workers

Service Area and Competitive Issues 1. Increasing number of

competitors

2. CON required

3. Increasing number of retirees

INTERNAL ADVANTAGES & DISADVANTAGES

Long-Term Competitive Advantages 1. Brand Name

2. Dominate Market Share

3. Financial Strength

Strategies 1. Product Development

– serving over 65 years of age market

2. Market Development – geographic

expansion

Strategies 1. Enhancement

– efficiency

2. Enhancement – increase training

Strategies 1. Penetration

– increase advertising

2. Alliance with existing provider

3. Product Development – serving over 65 years

of age market

Short-Term Competitive Advantages

1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

Long-Term Competitive Disadvantages

1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

Short-Term Competitive Disadvantages

1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

Strategies 1.

2.

3.

for matching external issues with internal competitive advantages and disadvan- tages. This approach, utilizing the complete results of a comprehensive external and internal analysis, better fosters strategic thinking concerning adaptive strat- egy alternatives.6

in the external/internal strategy matrix, adaptive strategic alternatives are suggested by the interactions of the seven sets of variables (long- and short-term competitive advantages, long- and short-term competitive disadvantages, and

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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266 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

general, health care, and competitive issues). in this example, the primary focus is the adaptive strategic alternatives, but this analysis could also be applied to the development of any type of strategy. in practice, particularly in open discussion sessions, some of the alternatives developed through the strategy matrix may be adaptive, market entry/exit, competitive, or value-adding service delivery and support strategies.

The strategies developed by matching the long-term competitive advantages with the general environment, health care system, service area, and competitive issues represent the primary adaptive strategies of an organization. The long- term competitive advantages are valuable, rare among competitors, difficult to duplicate, and sustainable. The short-term competitive advantages may soon be duplicated, particularly if the service areas and competitors are undergoing change, but these advantages must be sustained for as long as possible. The long- term competitive disadvantages represent areas where internal “fix-it” strategies will have to be addressed because other organizations provide a competitive advantage that is valuable to stakeholders. The short-term competitive disad- vantages are fixable but still represent a significant impediment to success. The long-term competitive advantage row as well as some key factors in the general environment, health care system and service area have been completed to illus- trate the use of the external/internal strategy matrix (note that both the general environment and service area factors suggest product development serving those over 65 years of age).

Product Life Cycle Analysis Product life cycle (PLC) analysis is a method, and typically a graphic representation, used to develop strategy alternatives based on the principle that all products/services progress through distinct stages of introduction, growth, maturity, and decline. These stages relate pri- marily to the changing nature of the marketplace, the product development process, and the types of demands made on management. Moreover, the nature of the product/service and industry may influence the life cycle stages. For example, in the medical technology industry innovation is strongly influ- enced by product/service life cycle stages. in addition, individual curves can be influenced by factors such as patent protection and barriers to entry.7 in evaluating product life cycles, the evolution of service category sales and prof- its (or a surrogate for sales such as the number of subscribers, hospital visits, or competitors) is tracked over time. This evolution will have strategic impli- cations for the organization. A typical Plc and the attributes of each stage are presented in exhibit 7–5.

Products and services have an introductory stage during which sales are increasing yet profits are negative. in this stage, there are few competitors (pros- pectors), prices are usually high, promotion is informative about the product category, and there are limited distribution outlets. in the growth stage, sales and profits are both increasing and, as a result, competing organizations enter the market (analyzers) to participate in the growth. During this stage, prices are still high but may begin to decline, promotion is directed toward specific brands, and there is rapid growth in the number of outlets.

The maturity stage of the Plc marks the end of rapid growth and the begin- ning of consolidation. in addition, market segmentation (defining narrower and

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 267

narrower segments of the market) occurs. in this stage, prices have stabilized or declined, price promotion becomes common, distribution is widespread, and competitors are concerned with maintaining market share (defenders). in the decline stage, total revenues and profits for the product or service are declining and will likely continue to decline over the long term.

Tracking the enrollment of health maintenance organizations (hMos) illus- trates the Plc (see essentials for a Strategic Thinker 7–1, “What is Managed care?” for an overview of managed care). hMos had an extended introductory period. The first hMo prototype, the ross-loos clinic in los Angeles, became operational in 1929. Forty years later, in 1970, there were only 33, generally not- for-profit, hMos in the united States serving approximately 3 million enrollees.8 The boost that pushed hMos from introduction to growth included the passage of the health Maintenance organization and resources Act of 1974. in addition to the federal funding for development and growth, hMos sought additional capital in the early 1980s. one method to accomplish this was to convert from a not-for- profit to a for-profit hMo.

EXHIBIT 7–5 The Product Life Cycle

Source: Adapted from Philip Kotler and Kevin Lane Keller, Marketing Management, 15th edn (New York: Simon & Schuster, 2016), p. 349. Reprinted by permission of Simon & Schuster.

Stage 1 Introduction

Stage 2 Growth

Stage 3 Maturity

Stage 4 Decline

Sales/Revenue

Pro�t

Time0

Dollars

PLC Stage Characteristics

DeclineMaturityGrowthIntroduction

Sales/Revenue DecliningSlow growthRapid growthLow Pro�ts LowHighPeak levelsNegative Competitors DecliningManyGrowingFew Cost/Customer LowLowAverageHigh Capital Access MinimalDebt/internalEquity/debtVenture

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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268 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

ESSEnTIALS for A STrATEgIC THInkEr 7–1

What is managed Care?

Managed care refers to health insurance plans or organizations that contract with doctors, hospitals, clinics, pharmacies, and other health care providers to control and efficiently man- age the costs and quality of the health care of plan enrollees. The contracted providers (hospitals, physicians, and so on) are called the plan’s network.1 Managed care organizations control cost and quality by negotiating reim- bursement rates and standards of care with network providers (often controlling where plan members may receive care) and shar- ing some costs (deductibles, copay, etc.) with members.

Most Americans who have health insurance are enrolled in one of several types of managed care health insurance plans. The most com- mon types are Preferred Provider Organizations (PPOs), Health Maintenance Organizations (HMOs), and Point-of-Service Plans (POS). Over 60 percent of those in managed care plans are in PPOs and almost 36 percent are enrolled in HMOs.2 Managed care plan enrollees are spread across commercial plans, Medicaid managed care plans, Medicare Advantage plans, and the military. The largest major national health plans are United Health Group, Anthem, Aetna, CIGNA HealthCare, Health Care Services Corporation, and Humana.3

Types of plans:

HMOs

Although there are several types of HMOs, the commonality among them is that HMOs are insurance companies and therefore “under- write” the claims. Thus, they are ultimately

responsible for the cost of covered medical care expenses provided to an enrollee.4 HMOs typically require a primary care physician (PCP) to manage the care of individual enrollees, including providing referrals to specialists within the HMO network when necessary. PCPs are typically internal medicine or fam- ily physicians operating practices as a part of the HMO network. Medical costs incurred by enrollees outside of the HMO’s network are typically not covered.

PPOs

These organizations typically are not insurance companies and, therefore, do not underwrite the costs of care. Rather, PPOs are coordinating organizations primarily for employer-based health insurance. A PPO negotiates with pro- viders to create a network of “preferred pro- viders” that are willing to provide cost savings to members of the plan.5 These plans most often do not require a PCP to manage care and no refer- rals are required to see a specialist.

POSs

These plans have attributes of both HMOs and PPOs and usually provide wider provider choice options than HMOs (enrollees may seek care out-of-the-network); however, such plans frequently require more-out-of-pocket costs to the consumer for out-of-network services.6 Most often the plans require PCPs to manage care within the network; however, subscribers of the plan can choose to stay in the network or receive care out of the network with a PCP referral.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 269

REFERENCES

1. Michael Bihari, “What’s the Difference between HMO and PPO Health Insurance?” www.verywell.com/ understanding-managed-care-1739066.

2. www.mcol.com/major_plans.

3. Ibid.

4. Michael, A. Morrisey, Health Insurance (Chicago,

IL: Health Administration Press, 2008) pp. 15–16.

5. Ibid.

6. Ibid.

exhibit 7–6 shows the national hMo enrollment from 1987 through 2016. The hMo enrollment growth stage extends through 1999 and then enters the mature stage. By the late 1990s, many urban markets experienced high managed care penetration, signifying local maturity. hMo consolidation in major markets con- tinued and company strategies were typical of market maturity – price compe- tition, extensive distribution development, aggressive promotion, and product differentiation. in addition, few new players were entering the market in these areas. confusing the picture are the rural and non-urban markets that continue to adopt managed care very slowly because of a lack of economies of scale and an insufficient number of providers. in addition, few new players are entering the market in these areas. overall enrollment shows some growth. in fact by 2016 total hMo enrollment in the united States, according to the Kaiser Family Foundation, was just over 93.4 million indicating that the life cycle remains in the maturity

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100 Millions National HMO Enrollment EXHIBIT 7–6 National HMO Enrollment

Source: MCOL Research compiled from historical Managed Care Fact Sheet National Managed Care Enrollment data for HMOs/.node/.blockUAT S 110—300x250(t,l)—Managed Care Executive/.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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270 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

stage, but the overall picture may hide two separate hMo life cycles that are in different stages – urban maturity, perhaps toward decline, along with rural/non- urban late-stage growth. efforts to control costs have resulted in health insurers, particularly in the individual market, offering fewer preferred provider organiza- tion (PPo) plans and more hMo plans.

Despite its limitations, Plc analysis is a useful tool for strategic planning. it provides a framework for assessing existing activities as well as new prod- ucts/services. The decomposition and critical review of market characteristics in conjunction with the Plc can serve as a guideline for strategy development. A Plc framework is particularly useful for product, marketing, and management strategies.

When considering new product/service lines, a Plc analysis can help answer questions not only about whether an activity is attractive for the organization, but also what might be the best market entry/exit strategy. historically, hospitals have developed the businesses or services that they already offer. however, devel- opment makes sense only if the business is in introductory or growth stages of the life cycle. if the hospital chooses to enter a mature business, it is usually better to joint-venture the business with an experienced party or acquire an existing pro- vider. introducing new product variations during late maturity or decline carries great risk unless the variations are sufficiently different such that an entirely new life cycle is created.

There are two important questions for strategy formulation when using prod- uct life cycles: “in what stage of the life cycle are the organization’s products and services?” and “how long are the stages (and the life cycle itself) likely to last?” To determine the stage of the Plc, management must use a great deal of judgment. Total service category revenues and profits may be monitored as an initial indi- cator. in addition, information obtained in external analysis concerning techno- logical, social, political, regulatory, economic, and competitive change is valuable in assessing both the current stage and the expected length of the cycle.

The stage in the Plc for a product or service indicates a likely strategic res- ponse and the level of resources that might be committed. exhibit 7–7 shows logi- cal strategic alternatives for each stage.

EXHIBIT 7–7 Strategic Choices for Stages of the Product Life Cycle

Stage 1: Introduction Stage 2: Growth Stage 3: Maturity Stage 4: Decline

Market Development Market Development Market Development Divestiture

Product Development Product Development Product Development Liquidation

Penetration Penetration Harvesting

Vertical Integration Enhancement Unrelated Diversification

Related Diversification Status Quo

Retrenchment

Divestiture

Unrelated Diversification

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 271

The relevance of the strategies shown in exhibit 7–7 depends on management’s perception of the timing of the cycle. Products and services that management determines have lengthy stages (or a long Plc) will require dramatically different strategies from those that management concludes have short stages or a short Plc. For instance, extensive vertical integration may be justified in the growth stage and even in the mature stage of the Plc if the cycle is judged to be a long one. however, the investment in and commitment to the product required in vertical integration may not be justified when the Plc is viewed as being relatively short.

Portfolio Analysis Strategic thinkers often think in portfolio terms because it is useful to have a framework for analyzing the mix of products and services.9 As a result, portfolio analysis, popularized by the Boston consulting Group (BcG), has become a fundamental tool for strategic analysis. Portfolio analysis allows for the assessment of the market position of the health care organization as a whole or its separate programs. As illustrated in exhibit 7–8, traditional BCG portfolio analysis is a graphic depiction and evaluation of an organization’s products and services in terms of relative market share and market growth rate. The products and ser- vices may then be characterized as stars, cash cows, problem children, or dogs and strategic alternatives generated.

EXHIBIT 7–8 BCG Portfolio Analysis

Stars Products and services that fall in this quadrant (high market growth and high mar- ket share) represent the organization’s best long-run opportunity for growth and profitability. These products and services are likely good investments and should be provided resources. Market development, product development, penetration, vertical integration, and related diversification are appropriate strategies for this quadrant.

Cash Cows Products and services in this quadrant have low market growth (probably in maturity and decline stages of the PLC) but the organization has a high relative market share. These products and services should be maintained but should consume few new resources. For strong cash cows, appropriate strategies are status quo, enhancement, penetration, and related diversification. For weak cash cows, strategies may include retrenchment, harvesting, divestiture, and perhaps liquidation.

Problem Children Problem children have a low relative market share position, yet compete in a high- growth market. Managers must decide whether to strengthen the products in this quadrant with increased investment through market development or product devel- opment or get out of the product/service category through harvesting, divestiture, or liquidation. A case may also be made for retrenchment into specialty niches.

Dogs These products and services have a low relative market share position and compete in a slow- or no-growth market. These products and services should consume fewer and fewer of the organization’s resources. Because of their weak position, the prod- ucts or services in this quadrant are often liquidated or divested or the organization engages in dramatic retrenchment.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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272 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

relative market share may be thought of as the market share held by the largest rival organization compared with the market share held by others in the service category. Growth rate can be measured by the changes in level of gross revenues or by population or service utilization growth (such as admissions or inpatient days). classification as high, medium, or low may be determined through com- parison with national or regional health care growth figures, return on alternative investments, or the stage in the Plc.10

The evaluation of products and services in portfolio analysis can be a dynamic process and used for the long-run planning of service and product life cycles. Therefore, portfolio management might be concerned with several time horizons. horizon 1 corresponds to managing the current fiscal reporting period, with short- term considerations. horizon 2 might be concerned with ramping up the next generation of growth opportunities, and horizon 3 with incubating new products and services that will sustain the organization far into the future. This time-horizon perspective is especially valuable for leaders trying to ensure that the organization will grow over the long term.11 See essentials for a Strategic Thinker 7–2, “What Are red ocean and Blue ocean Strategies?” that helps explain market positioning.

ESSEnTIALS for A STrATEgIC THInkEr 7–2

What Are red ocean and Blue ocean Strategies?

“The only way to beat the competition is to stop trying to beat the competition.”1 Red oceans are all the industries in existence today. The market space is known, the industry boun- daries are defined, and the competitive rules are understood. “Products become commodities and cutthroat competition turns the red oceans bloody.”2 Blue oceans, on the other hand, are defined by untapped market space and the opportunity for high growth and profits.

Organizations in red oceans try to beat the competition by building a defensible position in an existing industry. Creators of blue oceans engage in value innovation.3 These firms do not try to beat the competition but focus on creat- ing leaps in value, thereby opening up new and uncontested market spaces.

There are three characteristics of a sound blue ocean strategy – focus, divergence, and a compelling tagline. First, strategies have focus and concentrate on a relatively few things that

are done very well. Curves, a women’s fitness company, entered the red ocean of fitness companies by focusing on the most desirable aspects of traditional health clubs and home exercise programs. Next, competitors in red oceans react to rivals and lose their uniqueness. Curves differentiated its services by getting rid of special machines, juice bars, and saunas and arranged a limited number of simple-to-oper- ate hydraulic machines in a circle to facilitate interactions among members, making the exer- cise experience fun. In blue oceans, organiza- tions differentiate themselves from the average industry profile. Finally, a compelling and truth- ful tagline effectively communicates the value innovation of blue ocean firms.4 Curves’ tagline could be “for the price of a cup of coffee a day you can obtain the gift of health through proper exercise with friends.”

There is an interesting paradox in blue ocean strategies. The more successful a firm is in value

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 273

An example of portfolio analysis for a health care institution is illustrated in exhibit 7–9. cash cow services, such as plastic surgery and substance abuse (lower left quadrant), have achieved high market share but the growth rate has slowed. These services should generate excess cash that may be used to develop stars and problem children services. Service lines in the upper left quadrant, such as women’s services, geriatrics, cardiology, and so on, have high market growth and a relatively high market share (and most likely high profitability). These ser- vices are the most attractive for the institution and should be provided additional resources and encouraged to grow (and become cash cows). Services in the upper right quadrant (neurology/neurosurgery, Gi/urology, emergency services, and so on) over time will move into the stars quadrant or the dogs quadrant. nurturing the services that will most likely move to the stars quadrant is important. Services such as psychiatry, vascular surgery, and pediatrics have low growth rates as well as a low relative market share (and most likely low profitability) and may be targets for reduction of scope strategies. note however, that in health care some “dog” quadrant services may be slated for maintenance of scope or even expan- sion based on community needs.

innovation, the more likely other firms are to imitate it.5 The easier it is to imitate the blue ocean strategy, the less likely the strategy can be sustained; thus the blue ocean turns red. Blue ocean creators then become conventional competitors in a bloody sea or must innovate again. Consider for example, Pfizer’s success with Viagra. Pfizer successfully reconstructed the market boundaries by shifting the focus from medical treatment to lifestyle enhance- ment. Pfizer was incredibly successful and today a plethora of FDA-approved erectile dysfunction products including Alprostadil, Caverject, CIALIS, Endex, LEVITRA, Muse, Sildenafil, Tadalafil, and Vardenafil are available.

Blue and red oceans have always coexisted and successful organizations learn to navigate both types of sea. The penchant to imitate, however, makes it necessary for organizations to understand competition in red oceans and how to create and sustain blue oceans. Much is known about how to navigate red oceans; much is to be learned about blue oceans.6

REFERENCES

1. W. Chan Kim and Renée Mauborgne, Blue

Ocean Strategy: How to Create Uncontested

Market Space and Make the Competition

Irrelevant (Boston, MA: Harvard Business

School Press, 2005).

2. Ibid.

3. Brian Leavy, “Value Pioneering – How to

Discover Your Own ‘Blue Ocean’: Interview with

W. Chan Kim and Renée Mauborgne,” Strategy

& Leadership 33, no. 6 (2005), pp. 13–21.

4. Kyle Bruce, “A Review of Blue Ocean Strategy:

How to Create Uncontested Market Space and

Make the Competition Irrelevant,” Journal of

Management and Entrepreneurship 10, no. 3

(2005), pp. 106–108.

5. John S. McClenahen, “Sailing the Ocean Blue,”

Industry Week 254, no. 3 (2005), pp. 20–21.

6. W. Chan Kim and Renée Mauborgne, “Value

Innovation: A Leap into the Blue Ocean,”

Journal of Business Strategy 26, no. 4 (2005),

pp. 22–29.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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274 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

EXHIBIT 7–9 BCG Portfolio Analysis for a Health Care Institution

Source: Adapted from Doris C. Van Doren, Jane R. Durney, and Colleen M. Darby, “Key Decisions in Marketing Plan Formulation for Geriatric Services,” Health Care Management Review 18, no. 3, pp. 7–20. Copyright © 1993, Aspen Publishers, Inc. Adapted by permission.

Stars Women’s Services

Geriatrics Cardiology/Cardiovascular

Oncology Pulmonary

Orthopedics

DogsCash Cows Psychiatry

Vascular Surgery Pediatrics

ENT Ophthalmology

General Medicine

Problem Children Neurology/Neurosurgery

GI/Urology Emergency Services

Ambulatory Surgery, Adult Ambulatory Surgery

LowMediumHigh

Relative Market Share Position

High

Medium

Low

Market Growth Rate

Plastic Surgery Substance Abuse

Extended Portfolio Matrix Analysis Although the BcG matrix may be used by health care organizations, portfolio analysis must be applied with care. For example, health care organizations typically have interdependent programs, such as orthopedics and pediatrics, which make a strategic service unit (SSu) difficult to define. Additionally, underlying the BcG matrix is an assumption that high market share means high profitability and that profits may be “milked” to benefit other programs with growth potential. in health care organizations, however, it is quite possible to have a high market share and no profit. For example, because of reimbursement restrictions, a high number of Medicaid patients may cause a physician practice to be unprofitable. Similarly, programs such as obstetrics, pedi- atrics, neonatal intensive care, and psychiatry may have high market share but be unprofitable for a hospital.12

The profitability issues suggest that portfolio analysis for health care organiza- tions might better utilize an extended portfolio matrix analysis – an extension of the BcG Portfolio Matrix to account for profitability in situations where high market share does not necessarily mean high profitability. The profitability dimension is measured by high or low profitability according to positive or negative cash flow or return on invested capital. The expanded matrix is presented in exhibit 7–10.

Shining stars have high market growth (typically in the early stages of the Plc), a high market share, and high profitability. This quadrant represents the best situation for a health care organization; however, it is likely that high profit- ability will attract competitors. Therefore, aggressive enhancement or product development will be required, yet market development may be difficult because

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 275

of the already high market share. in addition, the organization will want to con- sider vertical integration and related diversification.

cash cow products and services have low market growth but a high market share and high profitability. in this situation, the organization has a dominant position in the market (perhaps 100 percent – not uncommon in a given health care service area) and further growth is unlikely. Again, the high profitability may attract competition, and the organization may have to defend its market share. Thus, strategies should be directed toward maintaining market dominance through enhancement. if the Plc is viewed as being long, the organization may want to engage in vertical integration or related diversification.

healthy children products and services have high market growth, a low market share, and high profitability. This quadrant demonstrates that there are situations in which it is possible to have a low share of the market and be profitable (at least in the short term or through segmentation). This situation is potentially attractive to the organization, which may be able to move the product or service into the shining star and, ultimately, cash cow quadrant. These products and services will require investment to nurture them and gain relative market share. Strategies may include market development, product development, penetration, or vertical inte- gration coupled with strong functional support.

For the faithful dog category, the products and services have low market growth and a low market share, but have been profitable. For example, many hospital services involve less-dominant units showing slow growth. however, if they are profitable, such units make a positive contribution to the overall health of the hospital and augment a full service line.13

EXHIBIT 7–10 Extended Product Portfolio Matrix

Source: Adapted from Gary McCain, “Black Holes, Cash Pigs, and Other Hospital Portfolio Analysis Problems,” Journal of Health Care Marketing, 7, no. 2 (June, 1987), p. 58. Reprinted by permission of the publisher, the American Marketing Association.

Black Hole

Cash Pig

Mangy Dog

Problem Child

Low

High Low Market Share

High

Market Growth Rate

Low

Shining Star

Cash Cow

Faithful Dog

Healthy Child High

Low

Market Growth Rate

High

LowHigh

Pro�t

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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276 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

For faithful dogs, managers must assess if increased market share will add to profitability. For instance, if profitable segments can be identified, it may be more advantageous to withdraw from broader markets, concentrate on a smaller seg- ment, and maintain profitability. in such situations, a status quo or retrenchment strategy may be appropriate. if profitability is likely to decline over time, a har- vesting or divestiture strategy may be best.

Black hole products and services have high growth and a high market share but low profitability. not all high-growth, high-share programs are profitable in health care. For instance, costly technological equipment may make an organiza- tion the sole provider of a service whose high cost cannot be recovered from indi- vidual patients. however, such services may contribute to the overall image of the organization and increase the profitability of other services.

nevertheless, having a high share for a service with low or negative profit- ability is quite disturbing. There must be a concentrated effort to reduce costs (enhancement strategy) or to add revenue without adding costs to such a pro- gram. “When circumstances prevent a service from generating most of its own cash inflow, it becomes a ‘black hole’ – a collapsed star sucking in light (profit or cash) – rather than shining and generating cash or profits.”14

if a black hole product or service cannot be made into a shining star, it is likely to become a cash pig. Therefore, enhancement and retrenchment strategies may be most appropriate. in addition, action plan strategies should be employed to reduce costs and increase revenue.

Problem children are low-share, high-growth, and low-profitability products and services that present both challenges and problems. Some of the products and services represent future shining stars and cash cows, although others represent future black holes and mangy dogs. Management must decide which products and services to support and which to eliminate. For supported products, market development with strong financial commitment is appropriate. For products that management does not feel can become shining stars, divestiture and liquidation are most fitting.

cash pig products and services have a high or dominant share, are experienc- ing low growth, and have low profitability. health care cash pigs are likely to be those well-established SSus with dominant shares that once were considered to be cash cows. Typically, they have well-entrenched advocates in the organizational hierarchy who support their continuance.15

A possible solution to the cash pig problem is to cut costs and raise prices. Therefore, aggressive retrenchment may be required. This strategy may allow the organization to give up the market share to find smaller, more profitable segments and thus create a smaller cash cow.

Products and services with low growth, a low share, and poor profit (mangy dogs) have a debilitating effect on the organization and should be eliminated as soon as possible. in this situation, other providers appear to better serve the market. Probably the best strategy at this point is liquidation, as it will be difficult to find a buyer for products and services in this quadrant.

Strategic Position and Action Evaluation Strategic position and action evaluation (SPAce), an extension of two-dimensional portfolio analysis (BcG), is used to determine the appropriate strategic profile of the organization. SPACE analysis is a method that includes a graphic depiction to indicate the applicability

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 277

of strategic alternatives based on factors relating to the service category strength, environmental stability, the organization’s relative competitive advantage, and the organization’s financial strength. By using SPAce, the manager can incorpor- ate a number of factors into the analysis and examine a particular strategic alter- native from several perspectives.16

The SPAce chart and definitions of the four quadrants are shown in exhibit 7–11. listed under each of the four dimensions are factors that individual numerical values ranging from 0 to 6 can be assigned. The numbers are then added together and divided by the number of factors to yield an average. The averages for environ- mental stability and competitive advantage each have the number 6 subtracted from them to produce a negative number. The average for each dimension is then plotted on the appropriate axis of the SPAce chart and connected to create a four- sided polygon. Factor scales for each dimension are presented in exhibit 7–12, which has been filled in for a regional hospital. The resulting shape of the polygon can be used to identify four strategic profiles – aggressive, competitive, conser- vative, and defensive. The quadrant with the largest area is the most appropriate general strategic position.

EXHIBIT 7–11 Strategic Position and Action Evaluation (SPACE) Matrix

Aggressive Profile Typical in an attractive service category with little turbulence in its environment. The organization enjoys a definite competitive advantage that can be protected with finan- cial strength. The critical factor is the entry of new competitors. Organizations in this situation should take full advantage of opportunities, look for acquisition candidates in their own or related areas, increase market share, and concentrate resources on products having a definite competitive edge.

Competitive Profile Typical in an attractive service category. The organization enjoys a competitive advan- tage in a relatively unstable environment. The critical factor is financial strength. Organizations in this situation should acquire financial resources to increase market- ing thrust, add to the sales force, extend or improve the product line, invest in productivity, reduce costs, protect competitive advantage in a declining market, and attempt to merge with a cash-rich organization.

Conservative Profile Typical in a stable market with low growth. Here, the organization focuses on financial stability. The critical factor is product competitiveness. Organizations in this situation should prune the product line, reduce costs, focus on improving cash flow, protect com- petitive products, develop new products, and gain entry into more attractive markets.

Defensive Profile Typical of an unattractive service category in which the organization lacks a competitive product and financial strength. The critical factor is competitiveness. Organizations in this situation should prepare to retreat from the market, discontinue marginally profitable products, aggressively reduce costs, cut capacity, and defer or minimize investments.

Source: Adapted from Alan J. Rowe, Richard O. Mason, Karl E. Dickel, and Neil H. Snyder, Strategic Management: A Methodological Approach, 4th edn (Reading, MA: Addison-Wesley Publishing, 1994), pp. 145–150. Reprinted by permission of Pearson Education Inc., Upper Saddle River, NJ.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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278 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

EXHIBIT 7–12 Strategic Position and Action Evaluation Factors for a California-based Regional Hospital

Factors Determining Environmental Stability

Technological changes Many 3210 654 Few

Rate of in�ation High 3210 654 Low

Demand variability Large 3210 654 Small

Price range of competing products/services Wide 3210 654 Narrow

Barriers to entry into market Few 3210 654 Many

Competitive pressure High 3210 654 Low

Price elasticity of demand Elastic 3210 654 Inelastic

Other: ______ 3210 654 ________

Average − 6 = −3.7

Critical factors

Fairly turbulent environment; strong competition: many technological changes.

Comments

Necessary to maintain financial stability because of turbulence in the environment; demand in market segments relatively stable; protect market niche against competition.

Factors Determining Service Category Strength

Growth potential Low 3210 654 High

Pro�t potential Low 3210 654 High

Financial stability Low 3210 654 High

Technological know-how Simple 3210 654 Complex

Resource utilization Inef�cient 3210 654 Ef�cient

Capital intensity High 3210 654 Low

Ease of entry into market Easy 3210 654 Dif�cult

Productivity, capacity utilization Low 3210 654 High

Other: Flexibility, adaptability Low 3210 654 High

Average = 3.7

Critical factors

Good growth and profit potential; strong competition.

Comments

Very attractive service category, but strong competition; degree of capital intensity increasing.

_________________________

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 279

Source: Adapted from Alan J. Rowe, Richard O. Mason, Karl E. Dickel, and Neil H. Snyder, Strategic Management: A Methodological Approach, 4th edn (Reading, MA: Addison-Wesley Publishing, 1994), pp. 148–149. Reprinted by permission of Pearson Education Inc., Upper Saddle River, NJ.

Factors Determining Competitive Advantage

Market share Small 0 1 2 3 4 5 6 Large

Product quality Inferior 0 1 2 3 4 5 6 Superior

Product life cycle Late 0 1 2 3 4 5 6 Early

Product replacement cycle Variable 0 1 2 3 4 5 6 Fixed

Customer/patient loyalty Low 0 1 2 3 4 5 6 High

Competition’s capacity utilization Low 0 1 2 3 4 5 6 High

Technological know-how Low 0 1 2 3 4 5 6 High

Vertical integration Low 0 1 2 3 4 5 6 High

Other: ______ 0 1 2 3 4 5 6 ______

Critical factors

Market share low; product/service quality very good.

Comments

The organization still enjoys slight competitive advantage because of quality and customer loyalty; can be expected to diminish, howeven, because of improving performance of competitive organizations.

Factors Determining Financial Strength

Return on investment Low 0 1 2 3 4 5 6 High

Leverage Imbalanced 0 1 2 3 4 5 6 Balanced

Liquidity Imbalanced 0 1 2 3 4 5 6 Balanced

Capital required/capital available High 0 1 2 3 4 5 6 Low

Cash �ow Low 0 1 2 3 4 5 6 High

Ease of exit from market Dif�cult 0 1 2 3 4 5 6 Easy

Risk involved in business Much 0 1 2 3 4 5 6 Little

Other: Inventory turnover Slow 0 1 2 3 4 5 6 Fast

Critical factors

Very little liquidity; too much debt.

Comments

Financial position very weak; cash inflow has to be increased in order to improve liguidity; outside financing difficult because of high leverage.

______________________

Average − 6 = −2.4

Average = 1.6

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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280 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

The factor scales shown in exhibit 7–12 are for a california-based regional hospital system specializing in health services for the elderly and chemically dependent. This hospital system is operating in a fairly turbulent environment with many competitive pressures and many technological changes (environ- mental stability axis).

Despite the turbulent environment, the hospital’s service category segments show good growth potential that attracts strong competition. increasing compe- tition requires increased investment in new facilities and technology. The hospi- tal still has a competitive advantage (as seen on the competitive advantage axis) derived from early entry into the market and it has been able to retain customer loyalty because of high-quality service. however, the hospital’s financial position (as seen on the financial strength axis) is weak because it financed new facilities through a substantial amount of debt. its liquidity position has eroded and cash flow continues to be a problem.

Which of the adaptive strategic alternatives is most appropriate for this regional system? The dimensions for this organization are plotted on the SPAce matrix shown in exhibit 7–13, demonstrating that the hospital is competing fairly well in an unstable but attractive service category segment. This organization can- not be too aggressive because it has few financial resources and the environment is a bit unstable. Therefore, it should adopt a competitive profile.

1

6

5

4

3

2

1

–1

–2

–3

–4

–5

–6

–6 –5 –4 –3 –2 –1 5432 6

Service Category Strength

AggressiveConservative

CompetitiveDefensive

Financial Strength

Environmental Stability

Competitive Advantage

3.7–2.4

–3.7

1.6

EXHIBIT 7–13 SPACE Profile for a California-based Regional Hospital System Specializing in Elderly and Chemically Dependent Care

The SPAce chart is a summary display; each factor should be analyzed indi- vidually as well. in particular, factors with very high or very low scores should receive special attention.17 exhibit 7–14 examines various strategic profiles that

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 281

EXHIBIT 7–14 Space Strategy Profiles

Source: Adapted from Fred R. David, Strategic Management, 2nd edn (Columbus, OH: Merrill Publishing Co., 1989), p. 216.

FS

ES

CA SCS

A �nancially strong organization that has achieved major competitive advantages in a growing and stable service category

FS

ES

CA SCS

An organization that has achieved �nancial strength in a stable service category that is not growing; the organization has no major competitive advantages

FS

ES

CA SCS

An organization with major competitive advantages but limited �nancial strength in a high-growth service category

FS

ES

CA SCS

An organization that has a very weak competitive position in a negative-growth, stable but weak service category

FS

ES

CA SCS

An organization whose �nancial strength is a dominating factor in the service category

FS

ES

CA SCS

An organization that suffers from major competitive disadvantages in a service category that is technologically stable but declining in revenue

FS

ES

CA SCS

An organization that is competing fairly well in a service category where there is substantial environmental uncertainty

FS

ES

CA SCS

A �nancially troubled organization in a very unstable and weak service category

Defensive Pro�les

Aggressive Pro�les

Conservative Pro�les

Competitive Pro�les

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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282 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

may be obtained in a SPAce analysis; exhibit 7–15 shows the adaptive alter- natives for each strategic profile. The SPAce plot for the regional hospital system resulted in a competitive profile. Accordingly, the most appropriate strategic alter- natives are penetration, market development, product development, status quo, or enhancement, with the most likely being enhancement. The hospital should continue to differentiate itself, but must rectify its financial position because an unstable environment may place unanticipated demands on the organization that will require an additional infusion of capital. in light of its financial problems, the hospital may have to pursue its goals (for example, market development) through a cooperation market entry strategy. A cooperation strategy – joining a network – may be important in a situation where health care systems, continuums, and refer- ral networks are the key to market development and penetration. in the end, the adaptive and market entry/exit strategic decisions are inextricably linked.

Conservative

• Status Quo • Unrelated Diversi�cation • Harvesting

Aggressive

• Related Diversi�cation • Market Development • Product Development • Vertical Integration

Competitive

• Penetration • Enhancement • Product Development • Market Development • Status Quo

Defensive

• Divestiture • Liquidation • Retrenchment

EXHIBIT 7–15 Strategic Alternatives for SPACE Quadrants

Program Evaluation Program evaluation is an analysis method used particularly by not-for-profit and public organizations for assessing their portfolio of programs and developing strategic alternatives in situations where market share, service category strength, and competitive advantage are not relevant. Program evaluation is particularly useful for state- or federally-funded institutions, such as state and county public health departments, state mental health departments, Medicaid agen- cies, community health centers, and public community hospitals. Despite the fact that these organizations are public and not-for-profit, they should develop explicit strategies and evaluate the adaptive strategic alternatives open to them. Although the internal/external strategy matrix and a form of portfolio analysis may be used

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 283

to evaluate public health programs,18 evaluation methods that consider increasing revenue and market share may be inappropriate or difficult to use.

Public and not-for-profit institutions typically maintain a number of pro- grams funded through such sources as state appropriations, federal grants, pri- vate donations, fee-for-service, and so on. in a public health department, such programs might include hiv/AiDS education, disease surveillance, disease control, immunizations, food sanitation inspection, on-site sewage inspection, and many more. usually, these programs have been initiated to fill a health care need within the community that has not been addressed through the pri- vate sector. These “health care gaps” have occurred because of federal or state requirements for coordination and control of community health and because of the large number of individuals without adequate health care insurance or means to pay for services.

Within the context provided by an understanding of the external environment, internal systems, and directional strategies, these not-for-profit institutions must chart a future through a set of externally and internally funded programs. The set of programs maintained and emphasized by the organization constitutes its adap- tive strategy. The degree to which they are changed (expansion of scope, reduction of scope, maintenance of scope) represents a modification of the adaptive strat- egy. The fundamental question is, “Does our current set of programs effectively and efficiently fulfill the mission and vision for the future?” This question may be addressed through a process of program evaluation. Two program evaluation methods that have been used successfully are needs/capacity assessment and program priority setting.

A needs/capacity assessment is an evaluation method for developing strategy alternatives for not-for-profit and public organizations based on community need and the organization’s capacity to deliver programs that meet the need. The set of programs in not-for-profit organizations are determined by the com- munity, although some programs may be mandated by law, such as disease con- trol, disease surveillance, and the maintenance of vital records (birth and death records). however, the assumption is that the legislation is a result of an important need and, typically, the mandate is supported by non-discretionary or categorical funding (funding that may be used for only one specific purpose as required by law). Therefore, in developing a strategy for a public health organization or not- for-profit organization serving the community, a needs/capacity assessment must be undertaken – community needs must be assessed vis-á-vis the organization’s ability (capacity) to address those needs.

Community need is one dimension for determining the strategy for a not- for-profit organization’s programs based on (1) clear community requirements (environmental, sanitation, disease control, and so on) and personal health care (primary care) gaps; (2) the degree to which other institutions (private and public) fill the identified health care gaps; and (3) public/community health objectives. Many not-for-profit institutions enter the health care market to provide services to those who otherwise would be left out of the system. Despite efforts to reform health care, these gaps are likely to remain for some time. health care gaps are identified through community involvement, political pressure, and community assessments such as those carried out by the centers for Disease control and Prevention (cDc). These gaps exist because there are too few private or public

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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284 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

institutions positioned to fill the need. Where existing institutions are willing and able to fill these gaps, public and not-for-profit organizations should probably resist entering the market. in addition, public and community health objectives must be considered when developing strategy. national, state, and community objectives such as the healthy People 2020 and healthy People 2030 objectives should be included as part of a community needs assessment.19

Organizational capacity is one dimension for determining the strategy for a not-for-profit organization’s programs based on its ability to initiate, maintain, and enhance its programs. organizational capacity is comprised of (1) funding to support programs, (2) other organizational resources and skills, and (3) the pro- gram’s fit with the mission and vision of the organization. Availability of funding is an important part of organizational capacity. Many programs are supported with categorical funding and accompanying mandates (program requirements dictated by a higher authority, usually federal or state government). often, how- ever, local funds supplement federal- and state-funded programs. For other pro- grams, only community funding is available. Thus, funding availability is a major consideration in developing strategy for public and not-for-profit organizations. in addition, the organization must have the skills, resources, facilities, manage- ment, and so on to initiate and effectively administer the program. Finally, pro- gram strategy will be dependent upon the program’s fit with the organization’s mission and vision for the future. Programs outside the mission and vision should be viewed as luxuries, superfluous, or wasteful. Similar needs assessment meth- odologies have been used extensively by public and not-for-profit organizations (see essentials for a Strategic Thinker 7–3, “What is needs Assessment?”).

ESSEnTIALS for A STrATEgIC THInkEr 7–3

What is needs Assessment?

Needs assessment is a systematic process for identifying gaps between two conditions: the current state of “what is” (real) and the desired state of “what should be” (ideal). Needs assess- ment is not intended to generate solutions; but rather, to assess the discrepancy between these two conditions. Conducting a needs assessment allows an organization to identify and prioritize needs; determine criteria for solutions; make data-informed decisions regarding human, financial, and other resources; and implement actions to improve programs, services, or organi- zational structure and operations.1

For example, if administrators at a local health clinic observe an increase in demand

for patient access based on the health-seek- ing behaviors of a specific target population, the clinic may conduct a needs assessment to determine the number of patients served (actual) as compared to patient demand for services (ideal). In doing so, these adminis- trators may discover that the clinic’s current capacity is 500 patients while patient demand for services is 1,000.

This example demonstrates that there is gap between “what is” and “what should be.” In other words, a discrepancy exists. When discrepancies are detected, organizational leaders may seek to identify the root cause(s) of this gap to craft effective and data-informed solutions. If there

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 285

exhibit 7–16 presents the adaptive strategic alternatives indicated for public organizations as they assess community needs and the organization’s capacity to fill them. Where the community need is assessed as high (significant health care gaps, few or no other institutions addressing the need, and the program is one of the community’s objectives) and the organization’s capacity is assessed as high (adequate funding, appropriate skills and resources, and fit with mission/ vision), then the organization should adopt one of the expansion of scope adap- tive strategies (upper left quadrant). Appropriate strategies might include vertical integration, related diversification, product development, market development, and penetration. When the community need assessment is low (no real need, the need has abated, the need is now being addressed by another institution, or the need does not fit with community objectives) but organization capacity is high (adequate funding, appropriate skills and resources, and fit with mission/vision), there should be an orderly redistribution of resources, suggesting reduction and maintenance of scope adaptive strategies (lower left quadrant). reduction of scope strategies should be given priority as the community need diminishes;

is little to no discrepancy, organizations may choose to direct resources to other priorities.

The needs assessment process is typically conducted in phases during which data are collected, analyzed, summarized, and pre- sented as a list of identified needs. Common data collection tools for conducting a needs assessment include surveys, focus groups, key informant interviews, document analysis, and observations. Irrespective of method, infor- mation is gathered from key stakeholders and others who have knowledge or experience with the issue. Decision-makers may then consider each need in the organization’s context to prior- itize issues for planning interventions.

In addition to assessing expressed needs based on supply and demand, as demonstrated in the previous clinic example, needs assess- ments can be used to identify other discrepancies between real and ideal states. For example, needs assessment can be used to evaluate:

● Prescribed or normative needs based on a target as defined by an expert.

● Relative needs between two groups in which differences are compared to one another.

● Perceived needs as defined by a specific group.

● Extrapolated needs or formula-driven esti- mates based on a standard.2

Rather than adopting an ill-fitting solution to a poorly defined problem, a rigorous needs assessment empowers organizational leaders to be thoughtful and strategic about how and when to deploy specific resources to address needs that are prioritized as the most important.

REFERENCES

1. J. W. Altschuld and D. D. Kumar, Needs

Assessment: An Overview (Thousand Oaks, CA:

SAGE, 2010).

2. M. J. Harris, Evaluating Public and Community

Health Programs (San Francisco, CA: Jossey

Bass, 2010).

Source: Matthew Fifolt, PhD, Assistant Professor, Department

of Health Care Organization and Policy, School of Public Health,

University of Alabama at Birmingham and Julie Preskitt, PhD,

Associate Professor, Department of Health Care Organization

and Policy, School of Public Health, University of Alabama at

Birmingham.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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286 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

however, phasing out a program may take some time or, alternatively, the uncer- tainty concerning the changing community needs may dictate maintenance in the short term. Appropriate adaptive strategies might include related diversification, retrenchment, harvesting, and status quo.

Where community needs have been assessed as low (no real need, the need has abated, the need is now being addressed by another institution, or the need does not fit with community objectives) and the organization has few financial or other resources to commit to programs (low organization capacity), one of the reduction of scope adaptive strategies should be adopted (lower right quadrant). These strategies include liquidation, harvesting, divestiture, and retrenchment. When community needs have been assessed as high but organizational capacity is low, maintenance and reduction of scope strategies are appropriate (upper right quadrant). Maintenance of scope strategies should be given priority because of the high community need; however, if resources dwindle or funding is reduced, reduction of scope may be required. Appropriate adaptive strategic alternatives include enhancement or status quo (maintenance of scope) and retrenchment or harvesting (reduction of scope). As resources become available, and organiza- tional capacity increases, programs in this quadrant will move to the upper left quadrant, enabling more aggressive (expansion) strategies to be selected.

The second method of developing adaptive strategies for not-for-profit or pub- lic programs involves ranking programs and setting priorities. Program priority

EXHIBIT 7–16 Public Health and Not-for-Profit Adaptive Strategic Decisions

Expansion of Scope

Vertical Integration• • Related Diversi�cation • Product Development

M• arket Development • Penetration

Maintenance/Reduction of Scope

• Enhancement • Status Quo • Retrenchment • Harvesting

Reduction of Scope

Liquidation• • Harvesting

Divestiture• • Retrenchment

Reduction/Maintenance of Scope

• Related Diversi�cation • Retrenchment • Harvesting • Status Quo

High

Community Need

Low

High Low Organizational Capacity

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 287

setting is another analysis method used by not-for-profit and public organiza- tions for developing strategies that involves rank ordering programs when all programs are considered important but resources are limited. As the demand for health services has increased and the resources available for service delivery has contracted, evidence-based priority setting methods that are transparent and inclusive have been developed and improved. A study of five Primary care Trusts in england demonstrated the difficulty in achieving the dual goals of priority set- ting effectiveness and information accessibility, and consequently transparency, among the decision makers.20 other studies have demonstrated how different issues fail to reach the actual decision makers in priority setting activities. The result is often skepticism regarding the objectivity of program priority setting.21

Program priority setting is significant because community needs (both the need itself and the severity of the need) are constantly changing and organiza- tional resources, in terms of funding and organization capacity, are almost always limited. invariably, more programs have a higher community need than resources are available. Therefore, the most important programs (and perhaps those with categorical funding) may be expanded or maintained. The organization must have an understanding of which programs are the most important, which should be provided incremental funding, and which should be the first to be scaled back if funding is reduced or eliminated.

The nature and emphasis on programs is the central part of strategy formu- lation in many public and not-for-profit organizations. however, a problem in ranking these programs is that typically all of them are viewed as “very impor- tant” or “essential.” This is particularly true when using likert or semantic differential scales to evaluate the programs. Therefore, it is necessary to develop evaluation methods that further differentiate the programs. one method that can be used is to list all the programs of the agency or clinic, each on a separ- ate sheet of paper posted in different areas of the room. Then using different colors or types of sticker, one for each of the adaptive strategies – expand the scope, reduce the scope, and maintain the scope – each member of the manage- ment team is asked to sort the organization’s programs into categories – those that should be expanded, those that should be reduced, or those to remain the same – based on the perceived importance of each to the organization’s mission and vision. The group may agree on several programs. Discussions can then be focused on those programs where there is disagreement. After points have been raised and discussed, the programs can be ranked again, hopefully leading to greater consensus from the group.

The Q-sort method provides a more formal method of differentiating the impor- tance of programs and setting priorities and can be used to prioritize a variety of issues.22 Q-sort is a ranking procedure that forces choices along a continuum in situations where the difference between the choices may be quite small. The pro- gram Q-sort evaluation is a forced-choice ranking procedure for differentiating and reaching consensus on the importance of programs/issues and setting priorities. it is particularly useful when experts differ on what makes one choice preferable over another. By ranking the choices using a Q-sort procedure, participants see where there is wide consensus (for whatever reasons used by the experts) and have an opportunity to discuss the choices for which there is disagreement (and, hopefully, reach greater consensus).

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Q-sort is part of the Q-methodology, a set of philosophical, psychological, statistical, and psychometric ideas oriented to research on the individual. Q-sort evaluation helps overcome the problem of all programs being ranked as very important by forcing a ranking based on some set of assumptions.23 once Q-sort has rank-ordered a series of objects (programs), numerals may be assigned to sub- sets of the objects for statistical purposes. Q-sort focuses on sorting decks of cards (in this case each card representing a program) and displaying the correlations among the responses of different individuals to the Q-sorts.

For ranking an organization’s programs, only the first step in using the Q-methodology is used – the Q-sort. in the Q-sort procedure, each member of the management team is asked to sort the organization’s programs into categories based on their perceived importance to the organization’s mission and vision. To facilitate the task, the programs are printed on small cards that may be arranged (sorted) on a table. To force ranking of programs, managers are asked to arrange the programs in piles from most important to least important. The best approach is that the number of categories be limited to nine and the number of programs to be assigned to each category be determined in such a manner as to ensure a normal distribution.24 Therefore, if a public health department had 49 separate programs that management wished to rank (culled from a larger list of programs), they may be sorted as shown in exhibit 7–17. notice that to create a normal

Most Important

Next Most Important

Next Most Important

Next Most Important

Next Most Important

Next Most Important

Next Most Important

Next Most Important

Next Most Important

HIV/AIDS Planning and Control 7.0

Epidemiology 8.0

Solid Waste 6.33

Maternity 5.22

Myco- bacteriology

4.55 Serology

4.0

Public Health Social Work

3.44

Plumbing Inspection

2.55

Animal Control

1.44

Indoor Air Quality

3.66

Milk Sanitation

7.0

Food Sanitation

8.0

Health Statistics

6.44

Radiation Control

5.44 Hypertension

4.55

Vital Records

4.0

Adolescent Health 2.66

Hearing Aid Regulation

1.88

Diabetes 3.77

STD Control

7.22

Newborn Screening

6.62

Emergency Medicine

5.50

HMO Regulation

4.55 WIC 4.0

Swimming Pools 3.11

Dental Health 3.87

Sewage Regulation

7.22

Licensure and Certification

6.77

Child Health 5.55

Lead Assessment

4.62

School Health Education

4.0

Medicaid Waiver

3.33

Vector Control

3.99

Tuberculosis Control

6.88

Family Planning

5.66

Public Health Nursing

4.75

Primary-Care Support

4.11

Administrative Support

3.99 Immunization

6.99

Health Education

5.66

Disaster Preparedness

4.77

Quality Assurance

4.11

Infection Control

5.77

Injury Prevention

4.77 Home Health

4.22

Seafood Sanitation

6.11

Lodging/Jails Inspection

4.88 Microbiology

4.44

Cancer Prevention

4.88

5% 7.5% 12.5% 15% 20% 15% 12.5% 7.5% 5%

EXHIBIT 7–17 Department of Public Health Q-Sort Results*

*Program name and mean score in each box.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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distribution (or quasi-normal), 5 percent of the programs are placed in the first pile or group, 7.5 percent in the second group, 12.5 percent in the third, and so on. in this case, there are two programs in the first group, four programs in the second group, six in the third, and so on.

Depending on the group in which it is placed, each program is assigned a score ranging from 1 to 9, where 1 is for the lowest- and 9 is for the highest-ranked programs. The score indicates an individual’s perception of that program’s importance to the mission and vision of the organization. A program profile is developed by averaging individual members’ scores for each program.

Based on the results of the Q-sort, programs may be designated for expan- sion, reduction, or maintenance of scope. For the public health programs in exhibit 7–17, food sanitation and epidemiology, sewage planning and operation, sexually transmitted disease (STD) control, and so on, might be earmarked for expansion. cancer prevention, lodging/jail inspection, injury prevention, and so on might be slated for maintenance of scope, whereas plumbing inspection, hearing aid dealer board regulation, and animal control may be marked for reduction.

The Q-sort procedure works well when incorporating several different sets of strategic assumptions or scenarios. For example, the programs may be sorted several times, each based on a different scenario. Then the group can determine which of the scenarios is most likely and make decisions accordingly.

Priority setting is likely to increase in importance for health care organizations as the demand for services continues to increase and resources become even more scarce. Priority setting, by its nature, appears threatening especially to those whose programs are judged to be of a lower priority. For this reason transparency and communication from upper leadership are critical elements in any effective priority setting process.25

Step 3: Evaluate and Select Market Entry/Exit Strategies once expansion of scope or maintenance of scope through enhancement adaptive strategies are selected, one or more of the market entry strategies must be used to break into or capture more of the market. All of the expansion adaptive strategies require some activity to reach more consumers with the products and services. Similarly, enhancement strategies indicate that the organization must improve what it is already doing, which requires market entry analysis. reduction of scope and market exit strategies are directed toward offering fewer products and ser- vices and markets and may require identifying buyers, closing facilities, reducing the product line, internal cost cutting issues, and managing declining demand.

The market entry strategies include acquisition, licensing, venture capital invest- ment, merger, alliance, joint venture, internal development, internal venture, and reconfiguring the value chain. Although any one (or several) of these strategies may be used to enter the market, acquisitions, mergers, and alliances have received most of the media attention over the past decade. Acquisition is the principal purchase strategy and mergers and alliances are the principal cooperation strategies. Market exit strategies are methods to either rapidly or slowly, partially or completely leave markets and similar to market entry, divestiture (the other side of acquisition) has most obviously shaped the health care landscape.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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The specific market entry/exit strategy considered to be appropriate depends on (1) the external conditions; (2) the pertinent internal strengths and weaknesses based on the organization’s resources, competencies, and capabilities; and (3) the goals of the organization. each of these three areas should be scrupulously evaluated.

External Conditions The first consideration in the selection of the market entry/exit strategy is the evaluation of the external situation. A review of the external issues and supporting documentation (see chapters 2 and 3) should pro- vide information to determine which of the market entry/exit strategies is most appropriate. exhibit 7–18 provides a list of representative external conditions appropriate for each of the market entry/exit strategies.

EXHIBIT 7–18 External Conditions Appropriate for Market Entry/Exit Strategies

Market Entry Strategy Appropriate External Conditions

Acquisition ● Growing market. ● Early stage of the product life cycle or extended maturity

stage. ● Attractive acquisition candidate. ● High-volume economies of scale (horizontal integration). ● Distribution economies of scale (vertical integration).

Licensing ● High capital investment to enter market. ● High immediate demand for product/service. ● Early stages of the product life cycle.

Venture Capital Investment ● Rapidly changing technology. ● Product/service in the early development stage.

Merger ● Attractive merger candidate (synergistic effect). ● High level of resources required to compete.

Alliance ● Alliance partner has complementary resources, compe- tencies, capabilities.

● Alliance partner has similar status. ● Market demands complete line of products/services. ● Market is weak and continuum of services is desirable. ● Mature stage of product life cycle.

Joint Venture ● High capital requirements to obtain necessary skills/ expertise.

● Extended learning curve to ensure necessary expertise.

Internal Development ● High level of product control (quality) required. ● Early stages of the product life cycle.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 291

Market Entry Strategy Appropriate External Conditions

Internal Venture ● Product/service development stage. ● Rapid development/market entry required. ● New technical, marketing, production approach

required.

Reconfiguring the Value Chain ● Competition dominated by a few traditional providers. ● Specialized market niche identified. ● New technology, marketing, production approach

required.

Market Exit Strategy Appropriate External Conditions

Fast ● Declining market – late stages of the product life cycle. ● Available buyers for the business or assets. ● High level of resource required to compete. ● Liquidate before others recognize the change in the

market.

Slow ● Late stages of the product life cycle. ● Extended product life cycle, as others leave, greater share

possible. ● Product category likely to remain profitable for near

future.

Partial ● Specialized market segments provide opportunities to redefine the market.

● Extended product life cycle.

Complete ● End or decline stage of the product life cycle. ● External change renders product category obsolete.

Resources, Competencies, and Capabilities As illustrated in exhibit 7–19, each market entry/exit strategy requires somewhat different resources, competencies, and capabilities. Before selecting the appropriate market entry or exit strategy, a review of the internal competitively relevant strengths and weaknesses should be undertaken (see chapter 4). A market entry/exit strat- egy might be selected if the required skills and resources, competencies, and capabilities (competitive advantages) are possessed by the organization. on the other hand, if they are not present, another alternative should be selected or a combination strategy of two or more phases should be adopted. The first phase would be directed at correcting the weakness (competitive disadvantage) that is prohibiting selection of the desired strategy, and the second phase would be the initiation of the desired market entry/exit strategy. in some cases a total redesign, or re-engineering, of a process may be required before a strat- egy can be implemented (see essentials for a Strategic Thinker 7–4, “What is re-engineering?”).

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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EXHIBIT 7–19 Appropriate Internal Resources, Competencies, and Capabilities for the Market Entry/Exit Strategies

Market Entry Strategy Appropriate Resources, Competencies, and Capabilities (Strengths or Weaknesses) Affecting Choice

Acquisition ● Financial resources. ● Capability to manage new products and markets. ● Capability to merge organizational cultures/structures. ● Rightsizing capability for combined organization.

Licensing ● Financial resources (to pay licensing fees). ● Support organization to carry out license. ● Capability to integrate new product/market into the present

organization.

Venture Capital Investment ● Capital to invest in speculative projects. ● Capability to evaluate and select opportunities with a high

degree of success.

Merger ● Management willing to relinquish or share control. ● Rightsizing capacity. ● Complementary service/product line. ● Capability to merge organizational cultures/structures.

Alliance ● Lack of competitive skills/facilities/expertise. ● Desire to create vertically integrated system. ● Need to control patient flow. ● Capability to coordinate boards. ● Willing to relinquish some control.

Joint Venture ● Lack of a distinctive competency. ● Additional resources/capabilities are required. ● Not enough time to develop internal resources, competencies,

or capabilities. ● Venture is far removed from core competency. ● Lack required skills and expertise.

Internal Development ● Technical expertise. ● Marketing competency. ● Operational capacity. ● Research and development capability. ● Strong functional organization. ● Product/service management expertise. ● Financial resources.

Internal Venture ● Financial resources. ● Entrepreneurial organization. ● Capability to isolate venture from the rest of the organization. ● Technical expertise. ● Marketing competency. ● Operational capacity.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 293

Market Entry Strategy Appropriate Resources, Competencies, and Capabilities (Strengths or Weaknesses) Affecting Choice

Reconfiguring the Value Chain

● New technology available. ● Entrepreneurial organization. ● Capability to rearrange value chain. ● Capability to adapt business model.

Market Exit Strategy Appropriate Resources, Competencies, and Capabilities (Strengths or Weaknesses)

Fast ● Significant drain on resources. ● Decision to focus on other market segments. ● Lack of management expertise in the product category.

Slow ● Product category remains profitable. ● Decision to focus on other segments or to trim product line. ● Capability to manage decline.

Partial ● Specialized market segments provide opportunities to rede- fine the market.

● Prolong product life cycle. ● Managing sales decline by ramping production as competi-

tors leave the market; shutting down operations when too many customers leave the market.

Complete ● No resources to support product category or market. ● Lack of marketing expertise in the segment. ● Giving up on success (profitability) with the product category.

Organizational Goals Along with the internal and external factors, organi- zational goals play an important role in evaluating the appropriate market entry/ exit strategies. As shown in exhibit 7–20, internal development, internal ventures, and reconfiguring the value chain offer the greatest degree of control over the design, production, operations, marketing, and so on of the product or service. on the other hand, licensing, acquisition, mergers, and venture capital investment offer the quickest market entry but control over design, production, marketing, and so on is low in the short term (in the longer term the organization may take complete control). Alliances and joint ventures offer relatively quick entry with some degree of control. The trade-off between speed of entering the market and organizational control over the product or service must be assessed by manage- ment in light of organizational goals.

Similarly, speed of exiting the market can be an important strategic decision. if financial resources are limited, selling all or part of the business or retrench- ment may generate cash or substantially reduce costs and be the difference in survival or failure. harvesting, while a slow exit from the market, allows for the generation of revenue without new investments and may continue for a number of years.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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EXHIBIT 7–20 Market Entry Strategies and Organizational Goals

Licensing

Acquisition

Merger

Alliance

Joint Venture

Internal Venture

Venture Capital Investment

Internal Development

Slow Market Entry

Rapid Market Entry

Low Initial Control Over Design, Production, Marketing

High Initial Control Over Design, Production, Marketing

Recon�gure The Value Chain

ESSEnTIALS for A STrATEgIC THInkEr 7–4

What is re-engineering?

Re-engineering has been used as part of stra- tegic planning to help organizations rethink the way processes are managed in organi- zations. Many health care organizations are using re-engineering to cut across depart- mental lines to completely redesign a pro- cess. Its founders and leading proponents, Michael Hammer and James Champy, define re-engineering as “the fundamental rethinking and radical redesign of process to achieve dra- matic improvements in critical, contemporary measures of performance, such as cost, quality,

service, and speed.” Key words in this definition are radical and process.

Re-engineering goes beyond quality improvement programs that seek marginal improvements. It asks a team to “start over” and completely and radically redesign a process. It does not mean tinkering with what already exists or making incremental changes that leave basic structures intact. It ignores what is and concentrates on what should be. The clean sheet of paper, the breaking of assumptions, the throw-it-all-out-and-start-again flavor of

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 295

re-engineering has captured and excited the imagination of managers across all industries. Radical redesign requires creativity and a will- ingness to try new things, questions the legit- imacy of all tasks and procedures, challenges all assumptions, breaks all the rules possible, and draws upon customer desires and needs.

The process is an end-to-end set of activities that together create value for a customer. Many organizations have become so specialized that few people understand the complete process. In the past, organizations have focused on improv- ing the performance of individual tasks in separ- ate functional units rather than on complete processes that typically cut across many functions. Everyone was watching out for task performance, but no one was watching to see whether all the tasks together produced the intended results of creating value for the customer. Dramatic improvements can be achieved only by improv- ing the performance of the entire process.

To be successful, management must be will- ing to destroy old ways of doing things and start anew. Many changes take place in an organiza- tion or unit when re-engineering is initiated:

● Work units change – from functional depart- ments to process teams.

● Jobs change – from simple tasks to multidi- mensional work.

● People’s roles change – from controlled to empowered.

● Job preparation changes – from training to education.

● The focus of performance measures and compensation change – from activity to results.

● Advancement criteria change – from perfor- mance to ability.

● Attitudes change – from protective to productive.

● Managers change – from supervisors to coaches.

● Organizational structure changes – from hierarchical to flat.

● Executives change – from scorekeepers to leaders.

Michael Hammer identified seven principles for organizational re-engineering: 1. Organize around outcomes, not tasks. By

focusing on the desired outcome, people consider new ways to accomplish the work.

2. People who use the output should perform the process.

3. Include information processing in the “real” work that produces useful information.

4. Treat geographically dispersed resources as if they were centralized.

5. Link parallel activities rather than inte- grate them. By coordinating similar kinds of work while it is in process rather than after completion, better cooperation can be fostered and the process accelerated.

6. Let “doers” be self-managing. By putting decisions where the work is performed and building in controls, organizations can eliminate layers of managers.

7. Capture information once and at its source.

SourceS

Michael Hammer and James Champy,

Reengineering the Corporation: A Manifesto

for Business Revolution (New York:

HarperBusiness, 1994).

Michael Hammer, Beyond Reengineering: How the

Process-Centered Organization Is Changing Our

Work and Lives (New York: HarperBusiness, 1996).

Michael Hammer, “Reengineering Work: Don’t

Automate, Obliterate,” Harvard Business Review

68, no. 4 (July–August, 1990), pp. 104–112.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Step 4: Evaluate and Select Competitive Strategies After the market entry/exit strategies have been selected, the strategic posture must be specified and the products/services positioned within the market using the generic strategies of cost leadership, differentiation, or focus. All the adaptive strategies (expansion, reduction, and maintenance of scope) require explicit stra- tegic posture and positioning strategies.

Strategic Posture Strategic posture concerns the relationship between the organization and the market and describes the pattern of strategic behavior. Strategic postures include defender, prospector, analyzer, and reactor. Any of these may be suitable, subject to: the external situation; the changing nature of the market; competition; the resources, competencies, and capabilities (competitive advantages) of the organization; and its vision and values. it is important to make sure the strategic posture is linked to and fits the adaptive and market entry/exit strategies.

external conditions are very important in the selection of strategic posture. Defender strategies tend to be successful when the external environment is rela- tively stable (change is slow and reasonably predictable). in such situations com- petitive rivalry is low and the barriers to entering the market are high. indeed, the cost-efficiency strategy of the defender tends to push entry barriers even higher. Because defender organizations focus on a narrow product line, the strategy works best when relatively extended Plcs are expected. in addition, long Plcs enable the organization to commit to vertical integration, develop cost efficiency, and create routine processes. Defender strategies are most effective in the mature stage of the Plc. The risks associated with the defender posture are that the Plc will be dramatically shortened by external change (new technology, for instance) or that a competitor can somehow unexpectedly take away market share.

Prospectors operate well in rapidly changing, turbulent environments. in these situations change is coming so rapidly that there are few rewards for efficiency. rather, the ability to incorporate the latest technology, feature, or design will reap the greatest rewards. in addition, prospectors are successful by utilizing a technol- ogy across several markets (prospecting in new high-growth markets). Products are usually in the introductory and early growth stages of the Plc and the cycle tends to be relatively short. As a result, entry barriers may be low and the intensity of rivalry typically is low (there is room for everybody). As products or services mature, prospector organizations move on to new products and services, typically in introductory stages of the Plc. Prospectors divest their maturing products and services to successful defender organizations that are consolidating.

Analyzers operate well in conditions where there is moderate external change with some product categories that are quite stable and some that are changing. competitive rivalry tends to be relatively high and these organizations cannot afford to ignore new product developments, markets, or product categories. Plcs for their stable products are moderately long but there are periodic innovations and disruptions. Therefore, these organizations must enter new markets and product areas. Analyzers typically do not enter the market in the introductory stage of the Plc. instead, they carefully watch product and market developments (the prospectors) and enter the most promising ones in the early growth stage of

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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the product life cycle (using one of the market entry strategies). Analyzers attempt to maintain balance with both mature- and growth-stage products or services and markets.

reactors tend to exit in protected or monopolistic markets or are legislatively restricted from moving into new markets or offering new products. like defend- ers, reactors often focus on efficiency rather than external changes. in addition, for products and markets in the decline stage of the product life cycle, a reactor strategy may be part of a harvesting strategy or a prelude to divestiture or liquidation.

The external conditions appropriate for each of the strategic postures are sum- marized in exhibit 7–21.

EXHIBIT 7–21 External Conditions Appropriate for Strategic Postures

Posture Strategy Appropriate External Conditions

Defender ● Stable external environments. ● Predictable political/regulatory change. ● Slow technological and competitive change. ● Products or services in mature stage of PLC. ● Relatively extended PLCs. ● High barriers to entry.

Prospector ● Turbulent environment. ● Rapid technological, political/regulatory, economic change. ● Introduction and early growth stages of PLC. ● Technology may be employed across markets. ● Low intensity of competitive rivalry. ● Numerous market and product opportunities. ● Fairly low barriers to market entry.

Analyzer ● Moderately changing environment. ● Technological, regulatory, economic, social, or competitive changes open

new opportunities. ● Some competitive rivalry in old and new markets. ● Some stable products and markets. ● Some new market and product opportunities. ● Growth and mature stage of PLC for existing products. ● Growth stage of PLC for new products.

Reactor ● Monopolistic or highly regulated market. ● Decline stage of PLC. ● Legislative restrictions to growth. ● New emerging technological change. ● Political/legislative uncertainty. ● “Game changing” moves by competitors.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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As shown in exhibit 7–22, there are certain strengths (or weaknesses) associ- ated with each of the strategic postures. For the defender posture the organization must be able to develop a core technology and be very cost efficient. Defender organizations try to drive costs down through vertical integration, specializa- tion of labor, a well-defined organization structure, centralized control and

EXHIBIT 7–22 Appropriate Internal Resources, Competencies, and Capabilities for Strategic Postures

Posture Strategy Appropriate Resources, Competencies, and Capabilities (Strengths or Weaknesses)

Defender ● Capability to develop a single core technology. ● Capability to be very cost efficient. ● Capability to protect market from competitors. ● Capacity to engage in vertical integration strategy. ● Management emphasis on centralized control/stability. ● Structure characterized by division of labor. ● Well-defined hierarchical communications channels. ● Cost control expertise. ● Well-defined procedures and methods. ● High degree of formalization, centralization (where a single central group/person,

typically top management, makes key decisions for the entire organization).

Prospector ● Capability to adjust organization to a variety of external forces. ● Technological and administrative flexibility. ● Capability and competency to develop and use new technologies. ● Capability to deploy and coordinate resources among numerous decentralized units. ● Decentralized planning and control (where key organizational decisions are

distributed throughout the organization closer to the customer). ● Flexible structure. ● Marketing plus research and development expertise. ● Low degree of formalization (few well-defined procedures and methods).

Analyzer ● Capability to mix high levels of standardization and routinization of core products/markets with flexibility and adaptation for new products/markets.

● Capability to utilize structure to accommodate both stable and dynamic areas of operation.

● Capability to utilize many different management skills. ● Effective lateral and vertical communication channels. ● Effective strategy and planning team.

Reactor ● Lack of finances. ● Lack of technical expertise. ● Lack of management skill. ● Lack of new product/service development and marketing skills. ● Long-term strategy to leave the market.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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standardization, and cost reduction while maintaining quality. Prospectors, on the other hand, are continuously moving in and out of products and markets looking for high growth. Therefore, they need organization structures, systems, and pro- cedures that are flexible. Prospectors rely on decentralized control. These types of organizations do not concentrate on developing efficiency but, rather, focus on the development and early adoption of new products and services. Analyzers attempt to balance defender strategies in stable markets with some prospecting in selected developing markets. Managing these organizations is often difficult because they must mix high levels of standardization and routinization with flexibility and adaptability. reactors tend to be reactors because of weaknesses or have adopted a strategy to leave the market.

Positioning Strategies As discussed in chapter 6, products/services may be positioned marketwide or for a particular market segment. cost leadership and differentiation are used as marketwide strategies or they are used to focus on a specific segment of the market.

Presence in a market requires that the products and services be positioned vis-à- vis competing products and services. Similar to the other strategy types, positioning depends upon the strengths and weaknesses (competitive advantages and dis- advantages) of the organization and the issues externally in the service area. in other words, how a product or service is positioned depends on the organization’s competi- tive situation. Therefore, the positioning strategies must be selected on the basis of resources, competencies, and capabilities (competitive relevant strengths), as well as external risks. For example, it would be difficult for an urban public community hos- pital dependent on limited county funding to be positioned as the high-technology hospital in the region (differentiation strategy). conversely, a well-funded hospital using the latest technology is unlikely to be positioned as the cost leader.

each of the generic positioning strategies has its own external risks that must be evaluated by the organization (see exhibit 7–23). Perhaps the biggest risk for cost leadership is technological change. Technological change in processes may allow competitors to achieve cost advantages. Technological change in products/ser- vices may result in differentiation, making the cost leader’s product less desirable.

EXHIBIT 7–23 External Risks Associated with Positioning Strategies

Generic Strategy External Risks

Cost Leadership ● Technological change that nullifies past investments or learning.

● Low-cost learning by industry newcomers or followers, through imitation or through their ability to invest in state-of-the-art facilities.

● Inability to see required product or market changes because of the attention placed on cost.

● Inflation in costs that narrow the organization’s ability to maintain sufficient price differential to offset competitors’ brand images or other approaches to differentiation.

(Continued)

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Generic Strategy External Risks

Differentiation ● The cost differential between low-cost competitors and the differentiated firm is too great for differentiation to hold brand loyalty; buyers sacrifice some of the features, services, or image possessed by the differentiated organi- zation for larger cost savings.

● Buyers’ need for the differentiating factor diminishes, which can occur as buyers become more sophisticated.

● Imitation narrows perceived differentiation, a common occurrence as the industry matures.

Focus ● Cost differential between broad-range competitors and the focused organization widens to eliminate the cost advantages of serving a narrow target or to offset the dif- ferentiation achieved by focus.

● Differences in desired products or services between the strategic target and the market as a whole narrows.

● Competitors find submarkets within the strategic target and out focus the focuser.

● Focuser grows the market to a sufficient size that it becomes attractive to competitors that previously ignored it.

Source: Adapted from Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980), pp. 40–41. Copyright © 1980, 1998 by the Free Press. All rights reserved. Adapted by permission of Simon & Schuster Adult Publishing Group.

The most significant risks for the organization that chooses a differentiation strategy are that emphasis on differentiation pushes costs too high for the market or that the market fails to see, understand, or appreciate the differentiation. in addition, there are risks for the organization adopting a focus strategy. often, the focusing organization is dependent on a small segment that may diminish in size, or purchasers may turn to the broader market for products or services. Movement toward marketwide products and services will occur if the differences in cost or differentiation become blurred.

exhibit 7–24 presents the appropriate internal strengths for each of the pos- itioning strategies. For an organization to use a cost leadership strategy, it must have or develop the ability to achieve a real cost advantage (not price) through state-of-the-art equipment and facilities and low-cost operations. This competitive advantage must be maintained through tight controls and emphasis on economies of scale.

Differentiation requires the ability to distinguish the product or service from other competitors. Typically, this requires technical expertise, strong marketing,

EXHIBIT 7–23 (Continued)

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 301

a high level of skill, and an emphasis on product development. A focus strategy is directed toward a particular segment of the market; however, either cost lead- ership or differentiation may be used. Therefore, the appropriate competencies are the same for either market segment or marketwide strategies. it is important that organizations adopting a focus strategy closely monitor their market so that specialized needs may be fully addressed and changes in the segment carefully tracked. otherwise, changes in the market may negate the differentiation or cost leadership. often benchmarking (see essentials for a Strategic Thinker 7–5, “What is Benchmarking?”) can be used to assess current internal strengths for success- fully implementing strategies.

EXHIBIT 7–24 Appropriate Internal Resources, Competencies, and Capabilities for the Positioning Strategies

Generic Strategy Resources and Competencies Organizational Capabilities

Cost leadership ● Sustained capital investment and access to capital.

● Process engineering skills. ● Intense supervision of labor. ● Products and services that

are simple to produce in volume.

● Low-cost delivery system.

● Tight cost control. ● Frequent, detailed control

reports. ● Structured organization and

responsibilities. ● Incentives based on meeting

strict quantitative targets.

Differentiation ● Strong marketing abilities. ● Product/service engineering. ● Creative flair. ● Capability and competency

in basic research. ● Reputation for quality or

technological leadership. ● Long tradition in the indus-

try or unique combination of skills.

● Strong cooperation from channels.

● Strong coordination among functions in R&D, product/ service development, and marketing.

● Subjective measurement and incentives instead of quantitative measures.

● Amenities to attract highly skilled labor, scientists, or creative people.

Focus ● Combination of the pre- ceding competencies and resources directed at a par- ticular strategic target.

● Combination of the pre- ceding organizational requirements directed at a particular strategic target.

Source: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980), pp. 40–41. Copyright © 1980, 1998 by the Free Press. All rights reserved. Adapted by permission of Simon & Schuster Adult Publishing Group.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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ESSEnTIALS for A STrATEgIC THInkEr 7–5

What is Benchmarking?

Benchmarking is a management process of com- paring an organization against a set of its peers or top performers on critical metrics for suc- cess. Benchmarking is generally considered to be part of an organization’s “learning” or continuous improvement efforts. In a sense, benchmarking is similar to “taking a picture” of one’s organization and comparing it with pictures of other organiza- tions. Some organizations simply identify a peer organization and try to emulate it; however, a better approach is to view benchmarking as an ongoing, long-lived process for senior manage- ment that is designed to gather and dissemi- nate both process and performance information throughout an organization.

The benchmarking process begins with the identification of a set of peers. The peers should be organizations that are similar, but not necessarily identical, to the organization and should operate on a scale that will not distort the understandings. The peers should not be direct competitors because of the collabora- tive nature of the process that will ensue. For example, a large health care system might use a telecommunications company as a benchmark- ing peer or a multifacility nursing home might seek a hotel chain.

Senior management of the peer organiza- tions should be contacted to initiate a dialog. The initiator of the benchmarking process is seeking a group of senior managers with whom every intimate detail concerning the strategies of the organizations may be shared. In other words, the initiator should describe the desire to share strategies, financial data, personnel data, and so on, as though the benchmarking participants were part of the senior manage- ment team of each organization. The number of

participants in a benchmarking group probably should be limited to seven or fewer to allow all participants equal opportunities to participate and gain from the experience.

Once a set of willing participants has been recruited, an initial meeting should be sched- uled for the purpose of establishing protocol – a set of ground rules for the operation of the benchmarking group. Although there is no well-established standard for such a proto- col, it should focus on creating an atmosphere in which full disclosure and frank discussion is facilitated. The meeting can be held at the location of one of the participants or it can be at a neutral site. Ground rules should deal with frequency of meetings, confidentiality, format of the meetings, processes for establishing the agenda for subsequent meetings, and the pro- cess of choosing the locations for meetings.

It may be useful to hire a professional facilitator for the first meeting and to deter- mine whether such a person would be help- ful in further meetings of the group. Each participant should leave the first meeting with the agenda for the second meeting and a set of work assignments to be completed by the next meeting. Work assignments might include detailed descriptions of the handling of customer complaints, how supplies are inventoried, how customer billing is pro- cessed, or other activities identified as worthy of discussion by the group. At each meeting, detailed minutes (perhaps a transcript) should be taken, produced, and distributed to the participants in a timely manner. The purpose of the minutes is to formalize the process and to minimize misunderstandings that may arise from failed memories.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 303

Step 5: Synthesize and Identify Implications of Strategy Choices – Strategy Map

After all the strategy formulation decisions have been made, they should be eval- uated in combination to ensure that they are logical and fit together. As suggested at the beginning of this chapter and illustrated in exhibit 7–2, the strategies selected must address an external issue, draw on an internal and competitively relevant strength or fix a competitively relevant weakness, maintain the organi- zational mission, move the organization toward the vision, and make progress toward achieving one or more of the organization’s goals. each strategy should be checked to determine if it meets these criteria.

The strategies of the organization can be mapped and the interdependence of strategies evaluated in concert for consistency and compatibility. evaluating all the strategic decisions together provides the “big picture” of where the organiza- tion is going and helps to determine whether the vision is truly being achieved. in the process of evaluating the strategic map, adjustments may be made and the strategies reconsidered. For example, a vertical integration adaptive strat- egy and a prospector strategic posture may not work together well. Similarly, a product development or diversification adaptive strategy through an internal development market entry strategy may be inconsistent with an analyzer strategic posture. in addition, the map provides useful shorthand for communicating and discussing the strategy of the organization.

Strategy Map: An Example A strategy map for a long-term care organization is shown in exhibit 7–25. This long-term care organization has been a free-standing, independent institution pro- viding assisted living services for some time. however, because of the growth of integrated health systems in the area, the organization’s leadership has decided that it needs to be part of a system to provide a steady referral base. Therefore, vertical integration as an adaptive strategy was selected. To accomplish the vertical integration strategy, management decided to develop an alliance with a nearby local hospital. The strategic posture is one of aggressively defending the organization’s traditional market (private pay and long-term care insurance), but management is willing to enter new products and markets if the viability

The formal agenda for subsequent meetings should include reports from each of the partici- pants. The frequency of meetings should be such that they impact the practices and procedures of the participants. For the most positive impact, meetings should occur at least on a quarterly basis.

The benchmarking process is not completed when the meetings end. The lessons learned and the insight gained must be shared with

subordinates. Participants in the benchmarking process should schedule regular meetings with subordinates for dissemination of information. In other words, the lessons should be shared widely within the organization to gain the great- est impact.

Source: Andrew C. Rucks, PhD, School of Public Health, University

of Alabama at Birmingham.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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seems reasonable (analyzer). in addition, management has selected market devel- opment directed toward entering into the Medicare segment of the market and has decided that the organization has the internal resources to accomplish Medicare certification. Furthermore, product development has been selected and management is planning to add an independent living facility on the organiza- tion’s campus to complement the current assisted living and nursing facilities. The product development strategy will be accomplished through a joint venture with a regional hotel chain. The organization’s leadership believes the market and product development strategies are consistent with their analyzer strategic pos- ture. The organization plans on developing an extensive advertising campaign (penetration strategy) aimed at communicating its highly effective differentiation strategy based on quality, high level of service, and caring. Additionally, the organization has committed to install a sophisticated information system includ- ing bedside terminals to further differentiate itself from its competition.

Such a strategy map provides a broad overview of the organization’s direction and a basis for the development of effective implementation strategies to carry out the organization’s overall strategy. These maps need not be complicated. indeed, at this level, simple is better. in stable markets, strategic managers can rely on compli- cated strategies built on detailed predictions of the future; however, in complicated, fast-moving markets where significant growth can occur, unpredictability reigns. When “business” becomes complicated, strategy should be simple.26

Strategic Momentum: Adaptive, Market Entry/Exit, and Competitive Strategies

Managing strategic momentum at this level is not a matter of keeping the organization on track: rather, it entails deciding if a completely new track or approach is warranted. Managers must decide if conditions require a change in

Market Entry/Exit Strategies

Adaptive Strategies

Competitive Strategies

CooperationExpansion of Scope Strategic Posture

Vertical Integration

Product Development

Market Development

Penetration

Alliance

Joint Venture

Internal Development

Analyzer

Positioning

Marketwide Differentiation

Quality Service CaringMaintenance of Scope

Enhancement

Hospital Alliance

Independent Living

Medicare Advertising

Information System

Development

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•

•

•

• • •

•

•

•

•

•

EXHIBIT 7–25 Map of Selected Strategies for a Long-Term Care Organization

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 305

the organization’s fundamental strategies. Authors of Strategic Control, lorange, Morton, and Ghoshal have called this decision “managing the strategic leap.” They suggest:

here the challenge is to reset the trajectory of the strategy as well as to decide on the relative levels of thrust and momentum for the new strategic direc- tion. The critical underlying assumptions that underpin the strategy are no longer viable, and the rules that govern the strategy must be redefined. This situation involves a mental leap to define the new rules and to cope with any emerging new environmental factors. Such a recalibrating of strategy requires a personal liberation from traditional thinking, an ability to change one’s mindset and confront the challenge of creating advantage out of dis- continuity. The question now is how to achieve a quantum leap in one’s strategy to capitalize on emerging environmental turbulence. one must pro- ceed by redefining the rules rather than by clinging to the unrealistic hope that the old rules are still valid.27

changes in one organization’s adaptive strategy create significant changes for other organizations, especially those in the same strategic group. Such dramatic change is relatively rare in stable environments but somewhat more frequent in dynamic environments. Signals that the basic strategy for the organization needs to be changed must be carefully monitored because the change will have serious long-term consequences. The questions presented in exhibit 7–26 are helpful in surfacing such signals, and they provide a start- ing point for discussion of the appropriateness of the organization’s adaptive strategy. The assumption underlying exhibit 7–26 is that the mission, vision, values, and goals are still appropriate but that the organization’s adaptive strategy should be questioned.

EXHIBIT 7–26 Managing Strategic Momentum – Adaptive Strategies

1. Are all the important assumptions on which the strategy is based realistic (external systems, competitive service areas, internal systems)?

2. Has the strategy been tested with appropriate strategic thinking tools?

3. Have the major stakeholders both inside and outside the organization that will be most influential in ensuring the success of the strategy been identified and evaluated?

4. If the adaptive strategy is to fill a currently unfilled niche in the market, has the organiza- tion investigated whether the niche will remain open long enough to return the capital investment?

5. Has the adaptive strategy been tested with appropriate financial analysis, such as return on investment and the organization’s ability and willingness to bear the risks?

6. Is the payback period acceptable in light of potential external change?

7. Does the strategy take the organization too far from its current products and markets?

8. Is the adaptive strategy appropriate for the organization’s present and prospective position in the market?

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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306 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

changes in market entry/exit strategies represent a “new way of doing business” for an organization. For example, developing alliances as a means of accomplishing market development is quite different from an internal develop- ment strategy and changes the entire orientation of the organization. evaluation of the effectiveness of the market entry/exit strategies provides insight into how well the adaptive strategies are being carried out in the marketplace (see exhibit 7–27). Similarly, a change in an organization’s strategic posture or pos- itioning represents a revolutionary change. For example, moving from a differ- entiation strategy to cost leadership initiates substantial change throughout the organization. The adaptive strategies and market entry/exit strategies may be appropriate, but if the product or service does not have the appropriate stra- tegic posture or is not positioned effectively, the organization may not achieve its goals (see exhibit 7–28).

EXHIBIT 7–27 Managing Strategic Momentum – Market Entry/Exit Strategies

1. Is the market entry/exit strategy the most appropriate way to achieve the mission, vision, and goals of the organization?

2. Is the market entry/exit strategy consonant with the values of the organization?

3. Is the market entry/exit strategy the best way to accomplish the adaptive strategy?

4. Is the market entry/exit strategy compatible with the adaptive strategy?

5. Does management understand the unique requirements of the market entry/exit strategy (purchase, cooperation, development, market exit)?

6. Does management understand the important market forces?

7. Have adequate financial resources been allocated to enter the market?

8. Does the selection of the market entry/exit strategy affect the ability of the organization to effectively position its products/services in the market?

9. Does the market entry/exit strategy place unusual strains on any of the functional areas?

10. Have new stakeholder relationships developed as a result of the market entry/exit strategy (customers, vendors, channel institutions, and so on)?

11. Has the relationship between the desire and need for rapid market entry or exit been properly analyzed?

12. Has the relationship between the desire and need for control over the products and services been achieved?

13. Have the trade-offs between costs and control been properly analyzed?

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 307

Strategic Posture

1. Is the strategic posture sustainable?

2. Have there been external developments (technological, social, regulatory, economic, or competitive) that have shortened product life cycles of important products/services?

3. Are there new market opportunities or challenges that suggest the organization should move more toward a prospector posture? Analyzer posture? Defender posture?

4. Has the organization developed the right mix of centralization and decentralization of decision making for the selected strategic posture?

5. Is the level of standardization and administrative flexibility appropriate for the strategic posture?

6. Is the level and type of communication appropriate for the strategic posture?

7. Is the strategic posture appropriate given the barriers to market entry/exit?

8. Has the level of vertical integration been appropriate for the strategic posture?

9. Has the organization been caught by surprise too often?

10. Does the organization need to evolve its strategic posture?

11. Are the overall strategy, strategic posture, and value-adding strategies compatible?

Positioning

1. Is the product/service positioning credible to the customer?

2. Can the organization use one of the other generic positioning strategies?

3. Is the positioning strategy appropriate considering the external opportunities and threats?

4. Will competitors allow the selected positioning?

5. Is the positioning strategy best suited to capitalize on the organization’s strengths and minimize its weaknesses?

6. Is the positioning of the organization’s products/services unique in the marketplace?

7. Is the positioning strategy defensible against new players trying to position themselves in a similar fashion?

8. Does the positioning strategy provide the appropriate image for the organization?

9. Is the positioning strategy sustainable?

10. Is the appropriate distribution channel being used?

11. Is the current promotional strategy appropriate?

12. Is the pricing strategy appropriate?

Chapter Summary

Several strategic alternatives are available to health care organizations. To initiate strategic thinking and planning, it is important that the organization has a process in place for understanding the internal systems, external conditions, and methods for evaluating strategic alternatives. There are several methods for deciding which of the adaptive strategic alternatives is most appropriate for an organization,

EXHIBIT 7–28 Managing Strategic Momentum – Competitive Strategies

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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308 StrAtEgiC mAnAgEmEnt of HEAltH CArE orgAnizAtionS

including SWoT analysis, external/internal strategy matrix, product life cycle (Plc) analysis, portfolio analyses (BcG and extended), strategic position and action evaluation (SPAce) analysis, and program evaluation. using these meth- ods, managers can classify internal and external factors to gain perspective con- cerning which adaptive strategic alternative or combination of alternatives is most appropriate.

once the most appropriate adaptive strategy (or combination of adaptive strategies) has been determined, a market entry/exit strategy must be selected. expansion and maintenance of scope strategies are initiated through one or more of the market entry strategies. entry strategies include acquisition, licensing, venture capital investment, merger, alliance, joint venture, internal development, internal venture, and reconfiguration of the value chain. The organization’s internal resources, competencies, and capabilities (competitively relevant strengths), the external conditions, and the organization’s objectives will determine which of these strategies is most appropriate. if market exit is selected, it must be determined if the exit will occur fast or slowly and if the market exit will be partial or complete. Divestiture, liquidation, and retrench- ment can happen very quickly while harvesting usually occurs over a number of years. Divestiture and liquidation are generally decisions to completely leave the market. harvesting and retrenchment are seen as decisions to partially exit the market.

After the market entry/exit strategy has been selected, competitive strategies, which include strategic posture and positioning strategies, should be evalu- ated and selected. Strategic postures include defender, prospector, and analyzer strategies. Positioning strategies include marketwide or focus strategies of cost leadership or differentiation. The external conditions and internal resources, capa- bilities, and competencies influence strategic posture and positioning strategies. Therefore, the most appropriate strategic posture and positioning strategy may be selected through an evaluation of the internal skills and resources of the organiza- tion and the external conditions.

chapters 8 through 10 discuss implementation strategies. chapter 8 will address strategy implementation through value-adding service delivery strategies.

Practical Lessons for Health Care Strategic Thinkers

1. The strategy analysis methods are tools to help strategic managers gen- erate strategic alternatives and evaluate the appropriateness of strategies given the organization’s external conditions and internal strengths and weaknesses.

2. use several strategic thinking tools (analyses) to surface different perspec- tives and insights.

3. remember there are no definitive answers to strategic decisions; only informed judgment.

4. evaluation of strategic alternatives requires organization and structured thinking.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Chapter 7 evaluation of alternatives and strategiC ChoiCe 309

THE LANGuAGE OF STRATEGIC MANAGEMENT: KEy TERMS AND CONCEPTS

Questions for Class Discussion

1. Why is the traditional SWoT Analysis a good place to begin? What are the problems with using SWoT?

2. explain the rationale underlying the external/internal strategy matrix.

3. Describe the product life cycle. how is it useful for thinking about the adaptive strat- egy of a health care organization?

4. Why is the length of the product life cycle important for strategy formulation?

5. What adaptive strategic alternatives are indicated for each stage of the product life cycle?

6. is BcG portfolio analysis useful for developing adaptive strategic alternatives for health care organizations?

7. explain the rationale for expanding the traditional BcG portfolio matrix.

8. identify appropriate adaptive strategic alternatives for each quadrant in the expanded portfolio matrix.

9. explain the strategic position and action evaluation (SPAce) matrix. how may adap- tive strategic alternatives can be developed using SPAce?

10. Why should program evaluation be used for public health and not-for-profit insti- tutions in the development of adaptive strategies?

11. What are the critical factors for determining the importance of programs within a not- for-profit organization?

12. Why should public health and not-for-profit organizations set priorities for programs?

13. Describe program Q-sort. Why would an organization use Q-sort?

14. how are market entry/exit strategies evaluated? What role do speed of market entry/ exit and control over the product or service play in the market entry/exit decision?

15. how are the strategic postures and the product life cycle related?

BcG Portfolio Analysis Benchmarking community need extended Portfolio Matrix Analysis external/internal Strategy Matrix

needs/capacity Assessment organizational capacity Product life cycle (Plc) Analysis Program evaluation Program Priority Setting

Program Q-Sort evaluation Q-sort re-engineering SPAce Analysis SWoT Analysis

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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notes

1. George Yip and Gerry Johnson, “Transforming Strategy,” Business Strategy Review 18, no. 1 (Spring 2007), pp. 11–15.

2. Peter F. Drucker, Management: Tasks, Responsibilities, Practices (new York: harper & row Publishers, 1974), p. 470.

3. Association of Academic health centers 2015 Annual Report, 1400 Sixteenth Street nW, Suite 720, Washington, Dc 20036, www.aahcdc.org. See also T. Shoemaker and M. D. Samuel, “Preparing for health care reform: Ten recommendations for Academic health centers,” Academic Medicine 86, no. 5 (2011), pp. 555–558.

4. Marilyn M. helms and Judy nixon, “exploring SWoT Analysis – Where Are We now?” A review of Academic research from the last Decade,” Journal of Strategy and Management 3, no. 3 (2010), pp. 215–251.

5. Jeroen D. h. van Wijngaarden, Gerald r. M. Scholten, and Kess P. van Wijk, “Strategic Analysis for health care organizations: The Suitability of SWoT,” International Journal of Health Planning and Management 27, no. 1 (2012), pp. 34–49.

6. This approach is a modified ToWS matrix analysis accounting for three levels of environmental analysis and determination of competitive advantages and dis- advantages. See heinz Weihrich, “The ToWS Matrix: A Tool for Situational Analysis,” Long Range Planning 15, no. 2 (1982), pp. 54–66.

7. Brian D. Smith, rosanna Tarricone, and vincenzo vella, “The role of Product life cycle in Medical Technology innovation,” Journal of Medical Marketing 13, no. 1 (2013), pp. 37–43.

8. Susanna e. Krentz and Suzanne M. Pilskaln, “Product life cycle: Still a valid Framework for Business Planning,” Topics in Health Care Financing 15, no. 1 (Fall 1988), pp. 47–48.

9. Geoffrey A. Moore, “To Succeed in the long Term, Focus on the Middle Term,” Harvard Business Review 85, no. 7/8 (July/August, 2007), p. 84.

10. Gary Mccain, “Black holes, cash Pigs, and other hospital Portfolio Analysis Problems,” Journal of Health Care Marketing 7, no. 2 (June 1987), pp. 56–57.

11. Moore, “To Succeed in the long Term,” p. 84.

12. robin e. Scott MacStravic, edward Mahn, and Deborah c. reedal, “Portfolio Analysis for hospitals,” Health Care Management Review 8, no. 4 (1983), p. 69. See also Margaret Brunton, “emotion in health care: The cost of caring,” Journal of Health Organization and Management 19, no. 4/5 (2005), pp. 340–352.

13. Gary Mccain, “Black holes, cash Pigs,” p. 56. 14. ibid., p. 61. 15. ibid., p. 62. 16. Alan J. rowe, richard o. Mason, Karl e. Dickel, and

neil h. Snyder, Strategic Management: A Methodological Approach, 4th edn (reading, MA: Addison-Wesley, 1994), p. 148.

17. ibid., p. 149. 18. Peter M. Ginter, W. Jack Duncan, Stuart A. capper, and

Melinda G. rowe, “evaluating Public health Programs using Portfolio Analysis,” Proceedings of the Southern Management Association, Atlanta (november 1993), pp. 492–496.

19. u.S. Department of health and human Services, Healthy People 2012 (Washington, Dc: u.S. Government Printing office, 2010). This publication presents the national health objectives. u.S. Department of health and human Services, Tracking Healthy People 2020 (Washington, Dc: u.S. Government Printing office, november, 2010). This publication is a statistical compendium that provides information on measuring 200 ten-year national objec- tives, technical notes, and operational definitions. every decade, the healthy People initiative develops a new set of science-based, 10-year objectives with the goal of improving the health of all Americans.

20. Suzanne robinson, lestlyn Williams, helen Dickinson, Tim Freeman, and Benedict rumbokl, “Priority-Setting and rationing in healthcare: evidence from the english experience,” Social Science and Medicine 75, no. 12 (2012), pp. 2386–2393.

21. Jacqueline Margaret cumming, “Priority-Setting Meets Multiple Streams: A Match to be Further examined,” International Journal of Health Policy and Management 5, no. 8 (2016), pp. 497–499.

16. how may the positioning strategic alternatives be evaluated?

17. Do health care organizations change directional and adaptive strategies often?

18. how can “doing the strategy” (managing the strategic momentum) provide infor- mation about changing the strategy?

19. As managers learn by doing, what strategies are most likely to change: adaptive, market entry/exit, or competitive?

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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22. See J. Preskitt, M. Fifolt, Peter M. Ginter, Andrew c. rucks, and M. S. Wingate, “identifying continuous Quality improvement Priorities in Maternal, infant and early childhood home visiting,” Journal of Public Health Management & Practice 22, no. 2 (2016), pp. e12– e20 and M. Fifolt, J. Preskitt, Andrew c. rucks, K. corvey, and e. c. Benton, “Promoting continuous Quality improvement in the Alabama child health improvement Alliance (AchiA) through Q-sort Methodology” Quality Management in Health Care 26, no. 1 (2017), pp. 33–39.

23. Fred n. Kerlinger and howard B. lee, Foundations of Behavioral Research, 4th edn (Fort Worth, TX: harcourt college Publishers, 2000), p. 722.

24. J. Block, The Q-Sort Method in Personality Assessment and Psychiatric Research (Palo Alto, cA: consulting Psychologist Press, 1978), p. 137.

25. neale Smith, craig Mitton, laura Dowling, Mary- Ann hiltz, Matthew campbell, and Shashi Ashok Gujar, “introducing new Priority Setting and resource Allocation Processes in A canadian healthcare organization: A case Study Analysis informed by Multiple Streams Theory,” International Journal of Health Policy and Management 5, no. 1 (2016), pp. 23–31.

26. Kathleen M. eisenhardt and Donald n. Sull, “Strategy as Simple rules,” Harvard Business Review 79, no. 1 (January, 2001), pp. 107–116; William M. Trochim, Derek A. cabrera, Bobby Milstein, richard S. Gallagher, and Scott J. leischow, “Practical challenges of Systems Thinking and Modeling in Public health,” American Journal of Public Health 96, no. 3 (2006), pp. 538–546.

27. Peter lorange, Michael F. Scott Morton, and Sumantra Ghoshal, Strategic Control (St. Paul, Mn: West Publishing, 1986), p. 11.

Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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Ginter, P. M., Swayne, L. E., & Duncan, W. J. (2018). The strategic management of health care organizations. John Wiley & Sons, Incorporated. Created from franklin-ebooks on 2023-10-14 00:09:16.

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