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6 Developing Strategic Alternatives

“The most serious mistakes are not being made as a result of wrong answers. The truly dangerous thing is asking the wrong question.”

— PETER F. DRUCKER

Introductory Incident

The Leapfrog Group

Private employers understood that frequent and systemic errors in hospitals were placing a significant number of employees at risk. They recognized that dysfunction existed in the health care marketplace – they were spending billions of dollars on health care for their employees with no way of assessing its quality or comparing health care providers. In addition, years of experience with total quality management had provided these leaders with a sense that low-quality and high-practice variance were contributing to continued inflation in health insurance premiums. As a result, the 1998 Business Roundtable – an association of CEOs from 200 of the Fortune 500 companies – came together to discuss how they could work together to use the way they purchased health care to have an influence on its quality and affordability.

A year later, the 1999 Institute of Medicine report, “To Err Is Human: Building a Safer Health System,” gave Leapfrog its initial focus – reducing preventable medical mistakes. The report found that up to 98,000 Americans die every year from preventable medical errors made in hospitals alone. In fact, there are more deaths in hospitals each year from preventable medical mistakes than there are from vehicle accidents, breast cancer, and AIDS combined. The report actually recommended that large employers provide more market reinforcement for the quality and safety of health care. The Business Roundtable founders realized that they could take “leaps” forward with their employees, retirees, and covered families by rewarding hospitals that implemented significant improvements in quality and safety. The Leapfrog Group was officially launched in November 2000.

The Leapfrog Hospital Survey compares hospitals' performance on national standards of safety, quality, and efficiency that are most relevant to consumers and purchasers of care. Hospitals that participate in The Leapfrog Hospital Survey achieve hospital-wide improvements that translate into millions of lives and dollars saved. Leapfrog's purchaser members use survey results to inform their employees and purchasing strategies. In 2012, more than 2,650 hospitals across the country were surveyed. Leapfrog ratings are posted on its website and are free to the public at www.leapfroggroup.org/cp.

Endorsed by the National Quality Forum (NQF), the practices (or “leaps”) are:

1. Computerized Physician Order Entry (CPOE). With CPOE systems, hospital staff enter medication orders via computers linked to software designed to prevent prescribing errors that occur because of illegible handwriting, decimal point errors, wrong medicine for the patient, overlooked drug interactions, and patient allergies. CPOE has been shown to reduce serious prescribing errors by more than 50 percent.

2. Evidence-Based Hospital Referral (EHR). Consumers and health care purchasers should choose hospitals with the best track records. By referring patients needing certain complex medical procedures to hospitals offering the best survival odds based on scientifically valid criteria – such as the number of times a hospital performs a procedure each year or other process or outcomes data – studies indicate that a patient's risk of dying could be significantly reduced.

3. Intensive Care Unit (ICU) Physician Staffing. Staffing ICUs with intensivists – doctors who have special training in critical care medicine – has been shown to reduce the risk of patients dying in the ICU by 40 percent.

4. Leapfrog Safe Practices Score. The National Quality Forum is a not-for-profit organization created to develop and implement a national strategy for health care quality measurement and reporting. Leap 4 is based on the National Quality Forum's (NQF) Safe Practices for Better Healthcare: A Consensus Report. The NQF published Safe Practices in May 2003, and updated the report in 2006, 2009, and 2010. The most recent version of the report endorsed 34 practices that should be universally used in applicable clinical care settings to reduce the risk of harm to patients. Included in the 34 practices are the three Leapfrog leaps; leap 4 incorporates hospitals' progress on a targeted subset of 17 of the 34 safe practices.

All of the leaps adhere to four criteria. (1) There is scientific evidence that their implementation would significantly reduce preventable mistakes. (2) Implementation by the health industry is feasible in the near term. (3) Consumers can appreciate their value. (4) Health plans, purchasers, and/or consumers can easily ascertain their presence or absence when assessing health care providers. Because the health care industry needs time to meet these standards, Leapfrog works with the provider community to arrive at aggressive but feasible target dates for implementation of Leapfrog's recommended quality practices.

Continuing to make hospital results available on the level of implementation of the safe practices will provide important information to consumers, enabling them to make more informed hospital choices. Purchasers and health plans can promote the Safe Practices Score by educating employees and consumers and calling attention to the importance of choosing the right hospital. Purchasers, through their community involvement in health care settings (as board members, volunteers, donors), can also be persuasive with health care providers about the need to extend their efforts in safety and quality.

REFERENCES

National Quality Forum, Safe Practices for Better Healthcare: A Consensus Report – Updated (2011).

Robert Wachter, “Patient Safety At Ten: Unmistakable Progress, Troubling Gaps,” Health Affairs 29, no. 1 (2010), pp. 165–173.

Learning Objectives

After completing the chapter you will be able to:

1. Understand and discuss the steps involved in the decision logic of strategy development.

2. Synthesize and integrate strategic thinking accomplished in situational analysis into a strategic plan for an organization.

3. Identify the hierarchy of strategies and strategic decisions required in strategic planning.

4. Understand the nature of directional strategies, adaptive strategies, market entry strategies, and competitive strategies.

5. Identify strategic alternatives available to health care organizations.

6. Provide the rationale as well as advantages and disadvantages for each of the strategic alternatives.

7. Understand that strategies may have to be used in combination to accomplish the organization's goals.

8. Map strategic decisions showing how they are linked as an ends–means chain.

Developing a Strategy

Strategic thinking involves an awareness of the environment; intellectual curiosity that is always gathering, organizing, and analyzing information; and a willingness to be open to creative ideas and solutions. Strategic planning concerns reaching conclusions about the information, setting a course of action, and documenting the plan. Therefore, strategic planning is essentially decision making – determining which strategy from among the many available alternatives the organization will pursue.

There are many strategic alternatives available to a health care organization and a particular organization may pursue several different types of strategies simultaneously or sequentially. Therefore, decision logic is required for strategy development. For instance, hospitals selecting to pursue various Leapfrog leaps, as discussed in the Introductory Incident, are making strategic choices that will both limit and create opportunities to pursue several different strategies. Similarly, the decision to adopt telehealth or telemonitoring is a strategic choice (see Perspective 6–1). In what order should strategic decisions be made? A merger or affiliation decision is part of a series of decisions rather than a single decision or an end in itself. In other words, there is a broader strategy that precipitated the merger or affiliation decision; and there will be subsequent strategic decisions that will have to be made to support the decision and make it successful.

Strategy formulation includes development of strategic alternatives, evaluation of alternatives, and strategic choice. This chapter classifies the types of strategies and develops a hierarchy of strategic alternatives. The hierarchy provides a strategic thinking map as guidance in decision making and strategic planning. Chapter 7 discusses strategic thinking methods for analyzing these alternatives to make a strategic choice.

PERSPECTIVE 6–1 Telehealth and Telemonitoring

The Centers for Medicare and Medicaid Studies define telehealth as remote health care delivery via monitoring. Telehealth is specifically defined as phone monitoring of the implementation of scheduled and prescribed encounters. Telemonitoring relates to the collection and transmission of vital signs and clinical data through electronic information-processing technologies. Quality improvement organizations have been particularly supportive of home health agencies in implementing telehealth tools to reduce acute care and hospitalization. Using these techniques, a health care provider can stay in contact with patients and monitor via telephone the extent to which recommendations are being followed and track compliance rates. These techniques support the assumption that proactively reaching out to patients with chronic disease will encourage people to change unhealthy behaviors and adopt more healthy lifestyles.

In many cases patients make poor or less-informed decisions about their personal health. The ability to accurately access a patient's condition via telemonitoring makes it possible to intervene when appropriate and provide equally important education regarding healthy living in a manner that is more convenient for both provider and patient.

Research has shown that the primary advantage of telemonitoring is that it increases patient compliance. Often, changes in a patient's condition can be detected at or before the onset of a serious event in much the same way as nurses monitor patients in an inpatient setting. Of course, real-time monitoring of data, direct patient feedback, and high levels of provider/patient interaction depends on digital proficiency on the part of both parties as well as effective multimodal communication.

Home patient monitoring assumes two things: (1) the rise of the responsible patient who can self-manage her/his long-term medical condition and (2) availability of mobile devices as effective go-betweens for clinicians and patients. Telemonitoring congestive heart failure patients, for example, has been shown to be successful in reducing hospitalizations and trips to the emergency department.

Telemonitoring allows patients more choices about how and when to react to changes in medical conditions before a genuine emergency occurs. Regardless of where a patient may be, wireless monitoring supports a more mobile lifestyle. Providers have made effective use of digital monitoring in home health by reducing the frequency of nursing visits and thereby reducing the cost of home health care. Because health care costs are growing so rapidly, the telehealth equipment market is growing as well. Many experts see great promise in the ability of telehealth to decrease the cost of health care delivery and possibly improve quality as compliance rates increase. There is little debate that telemonitoring has and will continue to improve the quality of life available to large numbers of patients worldwide.

  Source: “Research and Markets: Tele-Health Monitoring: Market Shares, Strategies, and Forecasts Worldwide, 2011–2017,” Telemedicine Business Week (June 29, 2011), pp. 82–83.

Linking Strategy with Situational Analysis

As demonstrated by the check list in Exhibit 6–1, the strategies selected by an organization should address external issues, draw on competitive advantages or fix competitive disadvantages, 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 the organization's strategic goals. This check-list procedure is an important 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 6–1 Check List for Linking Strategic Alternatives with Situational Analysis

The Decision Logic of Strategy Development

The decision logic of strategy formulation is illustrated in Exhibit 6–2. Decisions concerning five categories of strategies – directional strategies, adaptive strategies, market entry strategies, competitive strategies, and implementation strategies – should be addressed sequentially with each subsequent decision more specifically defining the activities of the organization. The first four of these strategy types make up strategy formulation and specify how the organization will define and attempt to achieve its mission and vision. Implementation strategies include objectives and plans for the organizational units to accomplish the strategies (managing strategic momentum).

As demonstrated in Exhibit 6–2, strategies form an ends–means chain. Thus, the organization must first establish or reaffirm and reach consensus on its mission, vision, values, and strategic goals (directional strategies) – the ends. Next, the adaptive strategies must be identified and are the means to accomplishing the directional strategies. Adaptive strategies are concerned with the type and scope of operations and specify how the organization will expand, reduce, or maintain operations. Third, market entry strategies must be selected and are the means to accomplish the adaptive strategies. Market entry strategies indicate the method for carrying out the adaptive strategies. Fourth, competitive strategies must be determined and are the means to carrying out the market entry strategies. Competitive strategies determine the organization's strategic posture and identify the basis for competing in the market. Finally, implementation strategies (value-adding service delivery strategies, value-adding support strategies, and action plans) must be developed to carry out the adaptive, market entry, and competitive strategies. The scope and role of the four strategy formulation types and the implementation strategies are summarized in Exhibit 6–3.

EXHIBIT 6–2 The Decision Logic of Strategy Formulation

EXHIBIT 6–3 Scope and Role of Strategy Types in Strategy Formulation

At each stage in the ends–means decision chain, previous upstream decisions and the implications for subsequent downstream decisions must be considered and perhaps reconsidered. As strategic managers work through strategic decisions, new insights and perspectives may emerge (strategic thinking) that suggest reconsideration of previous strategic decisions. Therefore, although the decision logic for strategic decisions is generally sequential, in practice it is very much an iterative process. Strategy includes a plurality of inputs, a multiplicity of options, and an ability to accommodate more than one possible outcome. Where mission and vision are ignored, or where there is no ends–means linkage between vision and strategy, strategy has no end object. In these situations, strategy suffers from being a means without an end, an end in itself, or a means of achieving an operational end, rather than being a design or plan for achieving the organization's mission and vision.1

Strategic decisions should be based on as much information and strategic thinking as possible. Sometimes strategic thinking occurs in situational analysis and at other times it occurs when managing strategic momentum. Before the strategic plan is adopted, it is important to remember that organization-wide understanding of, and commitment to, the strategies must be developed if they are to be managed successfully (strategic momentum). The choice of a strategic alternative creates additional direction for an organization and subsequently shapes its internal systems (organization, technology, information systems, culture, policies, skills, and so on). Strategic momentum is reinforced as managers understand, commit, and make decisions according to the strategy.

Exhibit 6–4 presents a comprehensive strategic thinking map of the hierarchy of strategic alternatives. The hierarchy represents a number of strategic alternatives available to health care organizations. This map not only identifies the alternatives but also the general sequential relationships among them. Using this organizing framework or decision logic in strategy formulation keeps it from becoming overwhelming and focuses strategic thinking. As strategic managers work through the strategic decisions, new understandings, insights, and strategies may (and in fact, should) emerge. Therefore, decision makers must work through the decision logic and back again, ensuring that all the proposed strategies make sense together. Strategic thinkers must always be able to see the bigger picture. Decision makers should be prepared to adjust and refine earlier decisions in the decision logic as they make “downstream” decisions.

EXHIBIT 6–4 Strategic Thinking Map – Hierarchy of Strategic Decisions and Alternatives

How-to formulas, techniques, or a linear process, of course, can never replace strategic thinking. Many of the greatest achievements in science, law, government, medicine, or other intellectual pursuits are dependent on the development of rational, logical thinkers; however, linear thinking can limit potential.2 Leadership is essential to foster creativity and innovation and allow for the reinvention of the strategy formulation process. Strategy formulation involves managing dilemmas, tolerating ambiguity, coping with contradictions, and dealing with paradox.3 Often leaders must creatively resolve the tension between competing information and alternatives and generate new options and solutions.4 In addition, strategy development cannot ignore the entrepreneurial spirit, politics, ethical considerations, and culture in an organization. The strategy formulation decision logic discussed in this chapter provides a starting point. It should foster strategic thinking, not limit it. The map starts the decision makers on their journey.

Directional Strategies: Mission, Vision, Values, and Goals

Chapter 5 explored mission, vision, values, and strategic goals and indicated that these elements are part of both situational analysis and strategy formulation. They are a part of situational analysis because they describe the current state of the organization and codify its basic beliefs and philosophy. In many ways, it provides the context for the organization to operate and includes its leaders' ethical and moral framework (see Perspective 6–2). In addition, these directional strategies are a part of strategy formulation because they set the boundaries and indicate the broadest direction for the organization. The directional strategies should provide a sensible and realistic planning framework for the organization.

Because formulation of the mission, vision, values, and strategic goals provides the broad direction for the organization, directional strategic decisions must be made first. Then the adaptive strategies provide further progression by specifying the type and scope of product/market expansion, reduction, or maintenance. The adaptive strategies form the core of strategy formulation and are most visible to those outside the organization. After the adaptive strategies have been selected, the directional strategies should be re-evaluated. Seeing the directional strategies (ends) and the adaptive strategies (means) together may suggest refinements to either or both. This broader perspective is essential in strategic thinking.

PERSPECTIVE 6–2 Ethics, Strategy, and a Changing Health Care Environment

Ethics are guidelines for action that are based on values, moral principles, or moral rights and duties, such as honesty, respect, and compassion. Some ethical guidelines are reflected in laws, whereas others are norms, customs, and social expectations that develop and are maintained by mutual consent.

It is useful to distinguish two categories of ethics in the health care environment: professional ethics and applied ethics. Professional ethics are the customs, norms, expectations, values, rights, and duties that guide individuals as they carry out particular work roles in society. Professional ethics reflect the expectations that society has for people who perform specific roles. We expect physicians and nurses to help rather than harm patients. We expect administrators and business officers to accept fiduciary responsibility (act for the benefit of the organization rather than themselves) and to be accountable to stockholders or boards of trustees for their decisions.

The norms guiding professional behavior can change over time, as society's expectations change. For example, over the past few decades, physicians' roles have evolved away from the expectation that doctors will make decisions on behalf of patients and for their health benefit to the expectation that they will provide all relevant information to patients and families and help them to make decisions about their treatment. As another example, the implementation of the Health Insurance Portability and Accountability Act (HIPAA) in April 2003 represented the legal enforcement of a social expectation that health-related information on patients will be kept strictly confidential; some widely accepted practices of information sharing in health care organizations had to be altered under the HIPAA guidelines because they were not perceived to reflect the priority that members of society placed on confidentiality.

Health care organizations involve the interaction of many sets of health professionals who, by definition, are bound by differing sets of ethics and norms. Decisions that must be made by the organization as a whole must be negotiated across these norms. For example, the imperative to help anyone in need of medical care must be balanced with the imperative to operate organizations that are financially sound. Organizations are best served when professionals are able both to represent their own guiding values and principles and to comprehend the values and principles that guide their colleagues.

In contrast to professional ethics, applied ethics is the application of values, principles, and expectations to broader social choices, such as whether all residents of a society have a right to some basic level of health care, or whether health care is a commodity that individuals can choose to purchase or not. Some social choices have a broad consensus. In the United States the responsibility of society to cover the costs of health care for the elderly is generally accepted. Other social choices are the subject of considerable disagreement and conflict, even when one set of values or expectations has been codified into laws. The rights of individuals to have abortions or to enforce their preferences on care at the end of life are examples of areas of ethical conflict that impact health care organizations. Organizations whose decision-making processes are affected by social choices that are the basis of ethical conflicts must consider carefully the values and norms that guide their constituents and the laws that represent the current societal consensus on the issue.

All actions have an ethical component, but often the underlying values for a decision are so widely shared that we do not recognize the ethical choices that we make. For example, we do not question the principle that health care is meant to benefit those who are sick. When faced with a decision about whether to provide effective or harmful treatment to someone who is sick, we automatically make the ethical decision to help rather than to harm the person. On the other hand, we sometimes face situations where alternative courses of action reflect contrasting values. For example, we value individuals' autonomy and their right to make decisions about their own health. If an individual wants a treatment that we believe to be harmful, should we respect his or her wishes and provide the treatment, or refuse the treatment and adhere to the principle that treatment should not be provided if it is known to cause harm?

  Source: Janet M. Bronstein, PhD, School of Public Health, University of Alabama at Birmingham.

Adaptive Strategies

From a practical standpoint, whether the organization should expand, reduce, or maintain scope is the first decision that must be made once the direction of the organization has been set (or reaffirmed). As shown in Exhibit 6–5, several alternatives are available to expand, reduce, or maintain the scope of operations. These alternatives provide major strategic choices for the organization.

Expansion of Scope Strategies

If expansion is selected as the best way to perform the mission and realize the vision of the organization, several alternatives are available. The expansion of scope strategies include:

• diversification,

• vertical integration,

• market development,

• product development, and

• penetration.

Diversification

Diversification strategies, in many cases, are selected because markets have been identified outside the organization's core business that offer potential for substantial growth. Often, an organization that selects a diversification strategy is not achieving its growth or revenue goals within its current market, and these new markets provide an opportunity to achieve them. There are, of course, other reasons why organizations decide to diversify. For instance, health care organizations may identify opportunities for growth in less competitive or less regulated markets such as medical office buildings, long-term care facilities, or outpatient care.

EXHIBIT 6–5 Strategic Thinking Map of Adaptive Strategic Alternatives

Diversification is generally seen as a risky alternative because the organization is entering relatively unfamiliar markets or new businesses that are different from its current activities. Organizations have found that the risk of diversification can be reduced if markets and products are selected that complement one another. Therefore, managers engaging in diversification seek synergy between corporate divisions (SBUs).

There are two types of diversification: related (concentric) and unrelated (conglomerate) diversification. Exhibit 6–6 illustrates possible related and unrelated diversification strategies for one type of primary health care organization.

EXHIBIT 6–6 Related and Unrelated Diversification by a Primary Provider

In related diversification, an organization chooses to enter a market that is similar or related to its present operations. This form of diversification is sometimes called concentric diversification because the organization develops a “circle” of related businesses (products/services). Exhibit 6–7 illustrates the circle of related products for a hospital that is interested in diversifying into another segment of the health care market, the long-term care market.

The general assumption underlying related diversification is that the organization will be able to obtain some level of synergy (a complementary relationship where the total effect is greater than the sum of its parts) between the production/delivery, marketing, or technology of the core business and the new related product or service. For hospitals, the two primary reasons for diversifying are to introduce non-acute care or sub-acute care services that reduce hospital costs, or to offer a wider range of services to large employers and purchasing coalitions through capitated contracts.5 The movement of acute care hospitals into skilled-nursing care is an example of related diversification.

EXHIBIT 6–7 Long-Term Care Options for Hospital Diversification

Source: Health Care Management Review 15, no. 1, p. 73. Copyright © 1990. Reprinted by permission of Aspen Publishers, Inc.

On the other hand, in unrelated diversification, an organization enters a market that is unlike its present operations. This action creates a “portfolio” of separate products/services. Unrelated diversification, or conglomerate diversification, generally involves semi-autonomous divisions or strategic service units. An example of unrelated diversification would be a hospital diversifying into the operation of a restaurant, parking lot, or medical office building. In such a case, the new business is unrelated to the provision of health care although it may be complementary (synergistic) to the provision of health services.

Research on diversification indicates that financial performance increases as organizations shift from single-business strategies to related diversification, but performance decreases as organizations change from related diversification to unrelated diversification.6 Single-business organizations may suffer from limited economies of scope whereas organizations using related diversification can convert underutilized assets and achieve economics of scope by sharing resources and combining activities along the value chain. Unrelated diversification has been found to increase strain on top management in the areas of decision making, control, and governance. In addition, unrelated diversification makes it difficult to share activities and transfer competencies between units. Sharing activities and transferring competencies has been particularly difficult in hospital diversification.7 Unrelated diversification has been generally unsuccessful in generating revenue for acute care hospitals.

Vertical Integration

A vertical integration strategy is a decision to grow along the channel of distribution of the core operations. Thus, a health care organization may grow toward suppliers or toward patients. When an organization grows along the channel of distribution toward its suppliers (upstream), it is called backward vertical integration. When an organization grows toward the consumer or patient (downstream), it is called forward vertical integration.

A vertically integrated health care system offers a range of patient care and support services operated in a functionally unified manner. The expansion of services may be arranged around an acute care hospital and include pre-acute, acute, and post-acute services or might be organized around specialized services related solely to long-term care, mental health care, or some other specialized area.8 The purpose of vertical integration is to increase the comprehensiveness and continuity of care, while simultaneously controlling the channel of demand for health care services.9

Vertical integration can reduce costs and thus enhance an organization's competitive position. Cost reductions may occur through lower supply costs and better integration of the “elements of production.” With vertical integration, management can better ensure that supplies are of the appropriate quality and delivered at the right time. For instance, some hospitals have instituted technical educational programs because many health professionals (the major element of production in health care) are in critically short supply.

Because a decision to vertically integrate further commits an organization to a particular product or market, management must believe in the long-term viability of the product/service and market. As a result, the opportunity costs of vertical integration must be weighed against the benefits of other strategic alternatives such as diversification or product development. Examples of vertical integration would be a hospital chain acquiring one of its major medical products suppliers (backward integration) or a drug manufacturer moving into drug distribution (forward integration).

Whether a strategic alternative is viewed as vertical integration or related diversification may depend on the objective or intent of the alternative. For instance, when the primary intent is to enter a new market in order to grow, the decision is to diversify. However, if the intent is to control the flow of patients to various units, the decision is to vertically integrate. Thus, a decision by an acute care hospital to acquire a skilled-nursing unit may be viewed as related diversification (entering a new growth market) or vertical integration (controlling downstream patient flow). Vertical integration is the fundamental adaptive strategy for developing integrated systems of care and is central to many health care organizations' strategies.

Numerous extensive health networks are the result of integration strategies. One study showed that over 89 percent of US hospitals belong to health networks or systems.10 The major reason that hospitals join networks and systems is to help to secure needed resources (financial, human, information systems, and technologies), increase capabilities (management and marketing), and gain greater bargaining power with purchasers and health plans.11 However, it appears that the pace of integration has slowed. In fact there has been some degree of “disintegration,” with health care systems divesting health plans, physician groups, home health care companies, as well as selling or closing hospitals and divesting themselves of skilled care services or facilities.12

To expand the supply of patients to various health care units, several patterns of vertical integration may be identified.13 In Exhibit 6–8, an inpatient acute care facility is the strategic service unit or core technology that decides to vertically integrate. Example 1 represents a hospital that is not vertically integrated. The hospital admits and discharges patients from and to other units outside the organization. Example 2 illustrates a totally integrated system in which integration occurs both upstream and downstream. In this case, patients flow through the system from one unit to the next, and upstream units are viewed as “feeder” units to downstream units.

EXHIBIT 6–8 Patterns of Vertical Integration Among Health Care Organizations

Sources: Adapted in part from K. R. Harrigan, “Formulating Vertical Integration Strategies,” Academy of Management Review 9, no. 4 (1984), pp. 638–652. Reprinted by permission of Academy of Management. And adapted in part from Stephen S. Mick and Douglas A. Conrad, “The Decision to Integrate Vertically in Health Care Organizations,” Hospital and Health Services Administration 33, no. 3 (fall 1988), p. 351. Reprinted by permission from Health Administration Press, Chicago.

Example 3 represents a hospital that has vertically integrated upstream. In addition, more than one unit is involved at several stages of the integration. For instance, there are two wellness/health promotion units, three primary care units, and three urgent care units. The dashed line represents the receipt of patients via external or market transfers. Example 4 illustrates a multihospital system engaged in vertical integration. Three hospitals form the core of the system, which also contains three nursing homes, two rehab units, a home-health unit, three urgent care facilities, three primary care facilities, and a wellness center. It is important to note that simply adding members to create an integrated health system is not enough. Institutions must be truly integrated and create a “seamless” system of care to achieve the desired benefits for patients (effectiveness) and cost savings (efficiency).

Finally, some health care systems are closed systems with fixed patient populations entirely covered through prepayment. Thus, whereas in Example 2, the health care organization is vertically integrated, in Example 5, patients are a part of the system. This insurance function is shown as an additional unit and identified by the letter i in the example.

Market Development

Market development is a divisional strategy used to enter new markets with present products or services. Specifically, market development is a strategy designed to achieve greater volume, through geographic (service area) expansion or by targeting new market segments within the present geographic area (market niche strategies). Typically, market development is selected when the organization is fairly strong in the market (often with a differentiated product), the market is growing, and the prospects are good for long-term growth. A market development strategy is strongly supported by the marketing, financial, information systems, organizational, and human resources functions. An example of a market development strategy would be a chain of outpatient clinics opening a new clinic in a new geographic area (present products and services in a new market).

One type of market development is called horizontal integration. Horizontal integration is a method of obtaining growth across markets by acquiring or affiliating with direct competitors rather than using internal operational/functional strategies to take market share from them. Many hospitals and medical practices engaged in horizontal integration, creating multihospital systems. Such systems were expected to offer several advantages such as increased access to capital, reduction in duplication of services, economies of scale, improved productivity and operating efficiencies, access to management expertise, increased personnel benefits, improved patient access, improvement in quality, and increased political power.14 However, many of these benefits did not materialize and the growth of horizontal integration strategies slowed.

Another special type of market development is a market-driven or focused factory strategy. The fundamental principle underlying a market-driven or focused factory strategy is that an organization that focuses on only one function is likely to perform better. This strategy involves providing comprehensive services across multiple markets (horizontal integration) for one specific disease such as diabetes, renal disease, asthma, or cardiac disease. Such focus allows an organization to achieve very high levels of effectiveness and efficiency. Regina E. Herzlinger explains the shift as:

… replacing giant providers and huge managed care networks, located in hard-to-reach sites with what I call “focused factories” (a nomenclature borrowed from the manufacturing sector) that provide convenient, specialized care for victims of a certain chronic disease, or for those who need a particular form of surgery, or for those who require a diagnosis, checkup, or treatment for a routine problem.15

Focused factories become so effective (high quality, convenient, and so on) and efficient (less costly) that other providers are “forced” to use their services. Thus, these other providers can obtain higher-quality services at less cost by outsourcing to the focused factory. In turn, the focused factory commands a place in the payment systems. Herzlinger's focused factory tools for providers of health care services are outlined in Perspective 6–3.

PERSPECTIVE 6–3 Focused Factory Tools for Providers of Health Care Services

The health care providers who flourish in this market-driven environment will give customers the mastery and convenience as well as the focused, cost-effective services they want by following the rules of successful service entrepreneurs:

• Pay Attention to the Customer – don't call them patients, don't fight their assertiveness, don't give them hype, give them real convenience and quality.

• Focus, Focus, Focus – throw out the general-purpose, everything-for-everybody model; focus on your strengths; design the system that will lower costs and optimize quality.

• Learn from the Rockettes – make sure that all the elements of your operating systems are integrated, resembling a well-choreographed dance, where disparate elements have been integrated into a harmonious whole.

• Resist the Edifice Complex – bricks and mortar are distractions; fixed costs drag the enterprise down; many assets are really liabilities (money pits that consume your time and capital).

• Lower Your Costs, Don't Raise Your Prices – successful enterprises succeed by achieving more output from every unit of input, not by raising prices; enterprises that lower their costs create sustainable competitive advantage.

• Use Technology Wisely – use technology to enhance the productivity of the health care process, not as a marketing tool.

• Don't Let the Dogma Grind You Down – be open to new and different ways of thinking; don't be a prisoner of your own thinking; obtain advice from the widest possible range of sources about what works and what doesn't.

• Be Ethical – don't seek competitive advantage in unethical ways such as discriminating against sick or poor people or by denying people the health care services they need.

• Breadth Beats Depth – don't fall for the lure of vertical integration; remember all the problems you have experienced in running just your corner of the health services world; a horizontally integrated chain of focused factories will amplify your strengths in each of the separate units that comprise the chain.

• Don't Get Big for Bigness's Sake – don't think of horizontal integration as a way of blocking competitors; think of it as getting really good at what you do.

• Measure Results: Your Own and Your Competitors' – what gets measured gets done: don't ignore results you don't like and don't bury the results in a file – use them actively in continually recreating your operations; don't believe your own press – you are at your most vulnerable when your measurement results are at their most flattering.

  Source: Regina E. Herzlinger, Market-Driven Health Care: Who Wins, Who Loses in the Transformation of America's Largest Service Industry (Reading, MA: Addison-Wesley Publishing Company, 1997), pp. 283–287.

In health care, focused factories have not escaped criticism. The success of some focused factories (cardiac surgery and treatment) has led some states to propose legislation restricting them. The Federal Medicare Prescription Drug Improvement and Modernization Act became law in 2003. An important part of the law included a moratorium that limited physician investments in specialty hospitals. Specifically identified were cardiac, orthopedic, surgical, and “other” hospitals owned by physicians. The focused factories have targeted profitable procedures from insured patients, requiring local not-for-profits to care for less profitable diseases/treatments without being able to offset the costs through the more profitable procedures being captured by focused factories. Therefore, many politicians are opposed to specialty hospitals and advocated for the federal legislation to become permanent.

There has also been concern as to whether health care-focused factories really reduce costs and in turn prices. Some experts suggest that price reductions are offset by the tendency of physicians with financial interest in the hospital to increase their volume with elective procedures. As for increasing quality, most experts agree that it is too early to judge. Some suggest that physicians referred easy cases to specialty hospitals and more complex patients to general hospitals, but there is no data to support the claim. Further, most experts agree that specialty hospitals initiated a “medical arms race” that might eventually drive up health care costs. The fear is that as general hospitals perceive the need to compete with the physician-owned specialty hospitals, they will develop dedicated centers as “hospitals-within-hospitals” or as freestanding facilities, forcing up overall costs.16

Product Development

Product development is the introduction of new products/services to present markets (geographic and segments). Typically, product development takes the form of product enhancements and product line extension. Product development should not be confused with related diversification. Related diversification introduces a new product category (though it may be related to present operations), whereas product development may be viewed as refinements, complements, or natural extensions of present products. Product development strategies are common in large metropolitan areas where hospitals vie for increased market share within particular segments of the market, such as cancer treatment and open heart surgery. Another good example of product development is in the area of women's health. Many hospitals have opened clinics designed to serve the special needs of women in the present market area.

Penetration

An attempt to better serve current markets with current products or services is referred to as a market penetration strategy. Similar to market and product development, penetration strategies are used to increase volume and market share. A market penetration strategy is typically implemented by marketing strategies such as promotional, distribution, and pricing strategies, and often includes increasing advertising, offering sales promotions, increasing publicity efforts, or increasing the number of salespersons.

Although still using their sales force to pursue expansion strategies, some pharmaceutical companies have recently moved toward e-detailing (electronic physician education concerning drugs) as a key component of their penetration strategies. The use of e-detailing by pharmaceutical companies is on the rise because increasingly physicians prefer to replace sales calls with other forms of communication and are accessing physician-only websites, online sources of information, and other interactive communication formats. For example, one study of health physicians and other medical professionals found that when e-detailing was used in combination with occasional visits by professional service representatives the results were particularly effective. The argument was made that e-detailing and periodic, in-person visits are complimentary in nature, less expensive, and using them in combination multiplied the effects of either approach on its own.17

Reduction of Scope Strategies

Reduction of scope strategies decrease the size and scope of operations. Reduction strategies include:

• divestiture,

• liquidation,

• harvesting, and

• retrenchment.

Divestiture

Divestiture is a contraction strategy in which an operating strategic service unit is sold off as a result of a decision to permanently and completely leave the market despite its current viability. Generally, the business to be divested has value and will continue to be operated by the purchasing organization.

Within the past decade, the strategy of “unbundling” (divesting by a hospital of one or more of its services) has become common. Thus, hospitals are carving out non-core services previously performed internally and divesting them. Typical services and products produced in a hospital that are not necessarily part of the core bundle of activities include laboratory, pharmacy, X-ray, physical therapy, occupational therapy, and dietary services.18 In addition, “hotel” services (laundry, housekeeping, and so on) formerly performed by hospitals are being contracted to outsiders. Even medical services in such specialty areas as ophthalmology are increasingly being performed outside the hospital in “surgi-centers” and may be candidates for divestiture.

Divestiture decisions are made for a number of reasons. See Perspective 6–3. An organization may need cash to fund more important operations for long-term growth or the division/SSU may not be achieving management's goals. In some cases health care organizations are divesting services that are too far from their core business or area of management expertise. For example, many multihospital systems have divested their HMO (purchased only a few years earlier) to concentrate on care delivery. A multihospital system purchasing a managed care organization actually represents unrelated diversification. Although the strategy appears logical and synergistic, managed care businesses are difficult to manage and there is little skill transfer from managing provider organizations.

Liquidation

Liquidation involves selling the assets of an organization. The assumption underlying a liquidation strategy is that the unit cannot be sold as a viable and ongoing operation. However, the assets of the organization (facilities, equipment, and so on) still have value and may be sold for other uses. Organizations, of course, may be partially or completely liquidated. Common reasons for pursuing a liquidation strategy include bankruptcy, the desire to dispose of non-productive assets, and the emergence of a new technology that results in a rapid decline in the use of the old technology.

On leaving a market, an aging hospital building may be sold for its property value or an alternative use. In a declining market, a liquidation strategy may be a long-term strategy to be carried out in an orderly manner over a period of years. Recently many hospitals have been liquidating their emergency helicopter operations, which had historically been allowed to operate as loss leaders because they brought prestige and positive public relations to the hospital. However, because of increasing costs and limited reimbursements, many hospitals have shut down and liquidated such operations.

Harvesting

A harvesting strategy is selected when the market has entered long-term decline. The reason underlying such a strategy is that the organization has a relatively strong market position but industry-wide revenues are expected to decline over the next several years. Therefore, the organization will “ride the decline,” allowing the business to generate as much cash as possible. However, little in terms of new resources will be invested.

In a harvesting strategy, the organization attempts to reap maximum short-term benefits before the product or service is eliminated. Such a strategy allows the organization an orderly exit from a declining segment of the market by planned downsizing. Harvesting has not been widely used in health care but will be more frequently encountered in the future as markets mature and organizations exit various segments. For instance, some regional hospitals that have developed rural hospital networks have experienced difficulty in maintaining their commitment to health care in small communities. The 20-bed hospitals frequently found in rural networks tend to struggle financially because of a lack of support from specialists and primary care physicians, an aging population, and flight of the young to urban areas. Twenty-bed rural hospitals are probably in a long-term decline with little hope for survival. On the other hand, 50-bed hospitals have managed to maintain or improve their financial position because of effective physician recruitment, good community image, and the continued viability of the communities themselves. Therefore, regional hospitals with rural networks may have to employ a harvesting strategy for the 20-bed hospitals while using development or maintenance of scope strategies for the 50-bed and larger hospitals.

Retrenchment

A retrenchment strategy is a response to declining profitability, usually brought about by increasing costs. The market is still viewed as viable, and the organization's products/services continue to have wide acceptance. However, costs are rising as a percentage of revenue, placing pressure on profitability. Retrenchment typically involves a redefinition of the target market and selective cost elimination or asset reduction. Retrenchment is directed toward reduction in personnel, the range of products/services, or the geographic market served and represents an effort to reduce the scope of operations.

Over time, organizations may find that they are overstaffed given the level of demand. As a result, their costs are higher than those of competitors. When market growth is anticipated, personnel are added to accommodate the growth, but during periods of decline, positions are seldom eliminated. A reduction in the staff members who have become superfluous or redundant is often central to a retrenchment strategy.

Similarly, in an attempt to “round out” the product or service line, products and services are added. Over time, these additional products/services may tend to add more costs than revenues. In many organizations, less than 20 percent of the products account for more than 80 percent of the revenue. In these circumstances, retrenchment may be in order.

Finally, there are times when geographic growth is undertaken without regard for costs. Eventually, managers realize they are “spread too thin” to adequately serve the market. In addition, well-positioned competitors are able to provide quality products/services at lower costs because of their proximity. In this situation, geographic retrenchment (reducing the service area) is appropriate. In many cases, a retrenchment strategy is implemented after periods of aggressive market development or acquisition of competitors (horizontal integration).

Maintenance of Scope Strategies

Often organizations pursue maintenance of scope strategies when management believes the past strategy has been appropriate and few changes are required in the target markets or the organization's products/services. Maintenance of scope does not necessarily mean that the organization will do nothing; it means that management believes the organization is progressing appropriately. There are two maintenance of scope strategies: enhancement and status quo.

Enhancement

When management believes that the organization is progressing toward its vision and goals but needs to “do things better,” an enhancement strategy may be used; neither expansion nor reduction of operations is appropriate but “something needs to be done.” Typically, enhancement strategies take the form of quality programs (CQI, TQM) directed toward improving organizational processes or cost-reduction programs designed to render the organization more efficient. In addition to quality and efficiency, enhancement strategies may be directed toward innovative management processes, speeding up the delivery of the products/services to the customer, and adding flexibility to the design of the products or services (marketwide customization).

Many times after an expansion strategy, an organization engages in maintenance/enhancement strategies. Typically after an acquisition, organizations initiate enhancement strategies directed toward upgrading facilities, reducing purchasing costs, installing new computer systems, enhancing information systems, improving the ability to evaluate clinical results, reducing overhead costs, or improving quality.

Status Quo

A status quo strategy is often based on the assumption that the market has matured and periods of high growth are over. In this situation, the organization has secured an acceptable market share and managers believe the position can be defended against competitors. In addition, a status quo strategy may be appropriate when an organization is in a period of “active waiting.” Active waiting is a temporary strategy for organizations operating in dramatically changing or volatile markets. During periods of active waiting, leaders must remain alert to market anomalies that signal potential threats and opportunities, build financial reserves, and be ready to make strategic changes.19

In a status quo strategy, the goal is to maintain market share and keep services at their current level. Environmental influences affecting the products or services should be carefully analyzed to determine when significant change is imminent. Typically, organizations attempt a status quo strategy in some areas while engaging in market development, product development, or penetration in others to better utilize limited resources. For instance, a hospital may attempt to hold its market share (status quo) in slow-growth markets such as cardiac and pediatric services and attempt market development in higher-growth services such as intense, short-term rehabilitation care, renal dialysis, ophthalmology, or intravenous therapy.

In mature markets, industry consolidation occurs as firms attempt to add volume and reduce costs. Therefore, managers must be wary of the emergence of a single dominant competitor that has achieved a significant cost differential. A status quo strategy is appropriate when there are two or three dominant providers in a stable market segment because, in this situation, market development or product development may be quite difficult and extremely expensive.

A brief definition of the adaptive strategies and their rationales for selection are summarized in Exhibit 6–9.

EXHIBIT 6–9 Definition and Rationales of the Adaptive Strategies

Market Entry Strategies

The expansion adaptive strategies specify entering or gaining access to a new market and the maintenance of scope strategies may call for obtaining new resources. Therefore, the next important decision that must be made for these strategies concerns how the organization will enter or develop the market – the market entry strategies. If a reduction adaptive strategy is selected, normally there is no market entry decision and market entry strategies are not used.

There are three major methods to enter a market. As illustrated in Exhibit 6–4, an organization can use its financial resources to purchase a stake in the new market, team with other organizations and use cooperation to enter a market, or use its own resources to develop its own products and services. It is important to understand that market entry strategies are not ends in themselves but serve a broader aim – supporting the adaptive strategies. Any of the adaptive strategies may be carried out using any of the market entry strategies but each one places different demands on the organization.

Purchase Strategies

Purchase strategies allow an organization to use its financial resources to enter a market quickly, thereby initiating the adaptive strategy. There are three purchase market entry strategies: acquisition, licensing, and venture capital investment.

Acquisition

Acquisitions are entry strategies for expansion through the purchase of an existing organization, a unit of an organization, or a product/service. Thus, acquisition strategies may be used to carry out both corporate and divisional strategies such as diversification, vertical integration, market development, or product development. There are many reasons to purchase another organization, such as to obtain real estate or other facilities, to acquire brands, trademarks, or technology, and even to access employees. However, the most common reason is to acquire customers.20

The acquiring organization may integrate the operations of the newly acquired organization into its present operations or may run it as a separate business/service unit. Acquisitions offer a method for quickly entering a market, obtaining a technology, or gaining a needed channel member to improve or secure distribution. It is usually possible to assess the performance of an organization before purchase and thereby minimize the risks through careful analysis and selection. The “build internally” versus “acquire” decision is one where strategic leaders must determine whether the benefits of ownership justify the costs and whether the acquiring organization has the product and process knowledge to capitalize on an opportunity quickly. If the acquiring organization does not have the expertise or capability and there is an organization that provides a good strategic fit that does have such expertise then purchase may be warranted.21 However, even a small acquired organization can be difficult to integrate into the existing culture and operations. Often it takes several years to “digest” an acquisition or to combine two organizational cultures.

Despite the difficulties of combining organizational cultures, the creation of health systems with unified ownership has been an effective strategy. Health systems have been better able than health networks (looser contractual- or alliance-based strategies) to provide needed resources, competencies, and capabilities. Direct ownership of assets enables systems to achieve greater unity of purpose and develop more focused strategies, on average, than more loosely organized networks. In addition, hospitals in health systems that have unified ownership generally have better financial performance than hospitals in contractually based health networks.22

Much of the growth of the for-profit hospital chains has been via a market development acquisition strategy (also called horizontal integration or buying market share). Aggressive market development through acquisition of independent hospitals has been used to build the nation's largest private for-profit hospital chains. For example, in California the seven largest hospital systems control more than one-third of the hospitals and licensed beds in the state.23 In the past two decades, horizontal integration and vertical integration through acquisitions and alliances have been key entry strategies for initiating rapid market growth by health care organizations.

Licensing

Acquiring a technology or product through licensing may be viewed as an alternative to acquiring a complete company. License agreements obviate the need for costly and time-consuming product development and provide rapid access to proven technologies, generally with reduced financial and marketing risk to the organization. However, the licensee usually does not receive proprietary technology and is dependent on the licensor for support and upgrade. In addition, the up-front dollar costs may be high.

Another common form of licensing is a franchise – the granting of an exclusive territorial license assuring the licensee all rights that the licensor has with respect to a defined activity.24 This practice is most commonly found in the field of trademark licensing. Franchisees benefit from exploitation of the goodwill, uniform format, and uniform quality standards symbolized by the franchisor's trademark. The license agreement by and between Blue Cross and Blue Shield Association and the various regional Blue Cross and Blue Shield Plans provides an example. Blue Shield Plans are granted the right to use the Blue Cross and Blue Shield names and trademarks in its trade and corporate name and the right to use the licensed marks in the sale, marketing, and administration of health care plans and related services within a geographic area. In such agreements no other health insurance provider can encroach upon the Plans' license under the Blue Cross and Blue Shield name within the stated territory.25

Venture Capital Investment

Venture capital investments offer an opportunity to enter or “try out” a market while keeping risks low. Typically, venture capital investments are used to become involved in the growth and development of a small organization that has the potential to develop a new or innovative technology. By making minority investments in young and growing enterprises, organizations have an opportunity to become close to and – possibly later – enter into new technologies.26

In addition, venture capital investments are a way for new health care organizations to grow. Venture capital investments in health care companies (including biotechnology, pharmaceuticals, medical devices, and health care) in early 2012 fell to its lowest level since 2010; however, the number of deals remains relatively high. Venture capital investment in health care technology firms was strong throughout the decade of the 1990s but e-health (Internet-related) companies began receiving a large share of health care venture capital beginning in 2000. During 2012 most of the venture capital investments were made in firms located in California and Massachusetts. By far most investments were in mature companies rather than seed money for start-ups. Unlike the 1990s, 2010s venture capital investments involved firms in genomic research (Warp Drive Bio), noninvasive prenatal testing (Ariosa Diagnostics), radiation therapy (Mevion Medical Systems), and endoscopic surgery (Apollo Endosurgery).27

Cooperation Strategies

Probably the most used – and certainly the most talked about – strategies of the late 1990s and early 2000s were cooperation strategies. Since 2006, cooperation strategies have slowed; however, with ACA supported (mostly) by the Supreme Court in 2012 more activity is expected. Many organizations have carried out adaptive strategies – particularly diversification, vertical integration, product development, and market development strategies – through cooperation strategies. They include mergers, alliances, and joint ventures.

Mergers

Mergers are similar to acquisitions. In mergers, however, the two organizations combine through mutual agreement to form a single new organization, often with a new name. Mergers have been used most often in the health care segment to combine two similar organizations (horizontal integration) in an effort to gain greater efficiency in the delivery of health care services, reduction in duplication of services, improved geographic dispersion, increased service scope, restraint in pricing increases, and improved financial performance.28 See Perspective 6–4. The other primary use of merger strategies (as well as acquisitions and alliances) in health care has been to create integrated delivery systems (vertical integration). There are four motives underlying such mergers:

1. Improve efficiency and effectiveness – by combining available resources and operations it is possible to exploit cost-reducing synergies and to take fuller advantage of risk-spreading managed care opportunities.

2. Enhance access – by providing a broader range of sophisticated programs and services and offering services at a greater number of sites, quality of patient care is improved.

3. Enhance financial position – by gaining market share, the sole or one of the dominant providers in the region's health delivery system is able to increase total revenue.

4. Overcome concerns about survival – by merging, a free-standing health care organization is better able to survive in an increasingly aggressive, market-driven environment where huge and powerful networks are experiencing cutbacks in managed care, Medicare, and Medicaid reimbursement.29

PERSPECTIVE 6–4 Mergers and Acquisitions

Hospital mergers and acquisitions declined throughout the decade of the 1990s and continued through the first decade of the 21st century both in terms of the number of deals and number of hospitals involved. Despite the decline, the hospital sector has had more mergers and acquisitions than any other health care services sector that includes hospitals, physician groups, and managed care (but does not include health care technology, a separate sector in the health care industry).

The number of hospital merger and acquisition deals declined by 60 percent from 1998 to 2006. However, the period 2004 through 2006 saw the number of deals rise slightly and level off through 2006 with fewer than 60 deals but with a dramatic increase in the number of hospitals involved. In the first quarter of 2012, the dollar value of hospital mergers was $600 million for 21 transactions, the largest being Highmark Blue Cross Blue Shield's $245 million acquisition of controlling interest in Pittsburgh's Jefferson Regional Medical Center. The quarter was off the record pace set in the second quarter of 2010 when 32 transactions valued at $3.5 billion was reported. The two large deals reported in 2010 were the acquisition of West Penn Alleghaney Health Systems by Highmark ($1.5 billion value) and HCA Holdings' acquisition of the remaining interest in HealthOne ($1.4 billion).

Levin Associates expects an uptick in M&A activity by the end of 2012 since the Supreme Court upheld the individual mandate and most of the rest of the ACA. Cost of capital is low and the potential for tax increases could spur end-of-year activity, especially in the long-term care category which is dominated by small, private firms and individuals who may be more interested in cashing in rather than taking a big tax hit.

Hospitals are not the only health care organizations involved in mergers. Physicians' group deals were increased to $4.2 billion from 21 transactions during first-quarter 2012. The largest deal was the $3.7 billion agreement between DaVita, a Denver-based dialysis chain with 1,800 locations, and HealthCare Partners that operates medical groups and physician networks with more than 2,500 employed or affiliated physicians in California, Florida, and Nevada. The DaVita–Healthcare Partners acquisition reflects the continuing efforts by providers to position themselves to rein in costs and to create alignments that enable greater control across the continuum of care.

Managed care posted nine deals valued at $730 million during second-quarter 2012 with the largest valued at $435 million for Towers Watson's acquisition of Extend Health, operator of a private Medicare exchange. The deal positions Towers Watson, a consulting firm primarily for employee benefits, to capitalize on the growing interest in private health exchanges. Managed care deals in 2011 were bigger with Wellpoint acquiring CareMore for $800 million and Aetna's acquisition of Prodigy Health for $600 million.

  Source: Based on Irving Levin Associates, Inc., The Health Care Acquisition Report, 17th edn, 2011 and Dick Tocknell, “Healthcare M&A Activity Surges in Q2,” HealthLeaders Media, July 26, 2012.

However, managing organizations that merge to create integrated systems has been difficult. There are several reasons why integrated health systems encounter significant obstacles in realizing the proposed benefits. The most frequently cited relate to the difficulty of creating an effective strategic fit, giving away too much money and power with respect to governance to the local governing board, inability to achieve operating efficiencies, and experiencing difficulties in realigning resources.30

As in acquisitions, a major difficulty in a merger is the integration of two separate organizational cultures. Mergers offer a more difficult challenge than acquisitions because a totally new organization must be forged. In an acquisition, the dominant culture remains and subsumes the other. In a merger, a totally new organizational culture (the way we do things) must be developed. Typically there are significant changes in the organizational structure, governance, senior and middle management, service mix, product mix, and outside relationships. Therefore, merging two distinctly different corporate cultures requires a great deal of time to be spent in communications at all levels in the organization. Medical staff and employees should engage in a reformulation of the vision, mission, and statement of the shared values of the new organization. Work groups must be formed to address how to effectively and efficiently meet the needs of patients. As well as communicating internally, external communications must be given top priority. Even with such efforts, truly merging the two organizational cultures into one will take years to complete.

Mergers and acquisitions and other forms of combination continue to be important market entry strategies for health care organizations. An environment conducive to large health care combinations, institutional coordination, demands for efficiency, and the continuum of care (seamless care) has fostered many of these mergers and acquisitions. In the early 2010s, low interest rates and the uncertainty of going it alone in the ACA future may increase cooperation strategies.

Alliances

Alliances are loosely coupled arrangements among existing organizations that are designed to achieve some long-term strategic purpose not possible by any single organization. Alliances include configurations such as federations, consortiums, networks, and systems.31 Strategic alliances are cooperative contractual agreements that go beyond normal company-to-company dealings but fall short of merger or full partnership.32 Alliances have been used to create health networks – loosely coupled or organized delivery systems. They are an attempt to strengthen competitive position while maintaining the independence of the organizations involved.

Some research suggests that organizations that develop these cooperative relationships are likely to have similar status in the marketplace and have complementary resources, competencies, and capabilities.33 For example, two organizations may establish an alliance when each one possesses strength in a different stage of the service category value chain – one organization has expertise in service delivery and another controls the distribution channel. Further, organizations may form coalitions to defray costs and share risk when they undertake high-cost capital or development-intensive initiatives. Finally, it has been suggested that the resources available from an alliance partner can facilitate an organization's effort to alter its strategic position.34 For instance, research indicates that biotechnology start-up organizations could enhance their initial performance and strategic position by establishing upstream and downstream alliances.35

In health care, the term “alliance” is sometimes used to refer to the voluntary organizations that hospitals join primarily to achieve economies of scale in purchasing. For some, this type of alliance provides the benefit of being part of a large system, yet allows them to exist as free-standing, self-governing institutions. Examples of some major hospital alliances include Premier, Voluntary Hospitals of America (VHA), and University HealthSystem Consortium. Purchasing alliances are a different type of alliance from that based on an expansion/cooperation strategy.

Strategic alliances, although not mergers, have many of the same problems – previously unrelated cultures have to learn to cooperate rather than compete; numerous “sessions” are required to determine what will be shared and what is proprietary, and how to balance the two; and efforts must be made to maintain cooperation over time within such a “loose” cooperative effort. On the other hand, strategic alliances offer several opportunities, including shared learning, access to expertise not currently “owned” by the organization, strengthened market position, and direction of competitive efforts toward others instead of each other. In addition, one of the advantages of integrated networks and strategic alliances is the increased access to resources to obtain new technology or reduce the need to purchase duplicate equipment. Further, it has been suggested that these arrangements are promising mechanisms to reduce technology-driven health care cost inflation.36 In some cases, an alliance can lead to a merger. For example, Breech Medical Center in Lebanon, Missouri moved its affiliation agreement with St. John's Health System of Springfield, Missouri to a full-asset merger over a several-year period (now St. John's Beech Regional Medical Center).

As the environment becomes more unpredictable, a number of health care providers have been seeking strategic alliances. Many primary providers have turned to alliances as vehicles for providing services, soliciting physician loyalty, and reducing investments in operations.37 Hospitals appear to form alliances with physicians for several reasons. Alliances serve to contract with the growing number of HMOs, to pose a countervailing bargaining force of providers in the face of HMO consolidation, and to accompany hospital downsizing and restructuring efforts.38 However, strategic alliances between physicians and hospitals should be anchored in their common purpose – improving patient care. The physicians involved may not concur with the hospital in its management of facilities, staffing, and so forth. In addition, conflict may emerge as hospitals diversify into areas that compete more directly with the physicians' own clinics, ambulatory care centers, and diagnostic centers. Finally, although the hospital would prefer to have many qualified physicians admitted to the staff (who could refer more patients), allied physicians would prefer to limit credentialing of outside physicians (controlling competition).

Joint Ventures

When projects get too large, technology too expensive, internal resources, competencies or capabilities too scarce, or the costs of failure too high for a single organization, joint ventures are often used.39 A joint venture (JV) is the combination of the resources of two or more separate organizations to accomplish a designated task. A joint venture may involve a pooling of assets or a combination of the specialized talents or skills of each organization. The four most common organizational forms used in health care joint ventures are:

1. Contractual agreements. Two or more organizations sign a contract agreeing to work together toward a specific objective.

2. Subsidiary corporations. A new corporation is formed (called an equity JV), usually to operate non-hospital activities.

3. Partnerships. A formal or informal arrangement in which two or more parties engage in activities of mutual benefit.

4. Not-for-profit title-holding corporations. Tax legislation enacted in 1986 allowed not-for-profit organizations to form tax-exempt title-holding corporations (providing significant benefits to health care organizations engaged in real estate ventures).40

Because of the dynamic health care environment, hospitals engage in joint ventures to lower costs and to improve and expand services. Joint ventures can be an innovative way to generate revenues, supplement operations, and remain competitive.41 Through the first half of the 2000s, the most common joint venture was between hospitals and physicians. Hospital/physician joint ventures are popular because they allow the hospital to pre-empt physicians as competitors and, at the same time, stabilize the hospital's referral base. Often joint ventures with hospitals increase physicians' profitability. Physicians enter joint ventures with hospitals to protect their incomes and autonomy, whereas hospitals are motivated to form joint ventures as a means of controlling medical care costs and gaining influence over physician utilization of hospital services. Changes in third-party payments have created competition based on price – joint ventures enable hospitals to reduce costs and compete more effectively.42

Although there are benefits to creating joint ventures, they have their own unique set of challenges. These challenges revolve around strategy, governance, economic interdependencies, and organization. For example, the parent organizations may hold different strategic interests and maintaining strategic alignment across separate organizations with different goals, market pressures, and stakeholders can be difficult. In addition, sharing governance can complicate decision making, particularly with separate reporting systems and methods for measuring success. Further, problems develop in providing services, staffing, and other resources. Finally, building a cohesive, high-performing organization with a unique culture has proven difficult for many joint ventures.43

Development Strategies

Organizations may enter new markets by using internal resources in what are called development strategies. This entry strategy takes the form of internal development, internal ventures, or reconfiguring the value chain. Diversification and vertical integration through internal development or internal ventures usually take considerably longer to achieve than through acquisition (although the costs may be lower). Reconfiguring the value chain finds new ways to deliver value to customers and changes the “business model.”

Internal Development

Internal development uses the existing organizational structure, personnel, and capital to generate new products/services or distribution strategies. Internal development may be most appropriate for products or services that are closely related to existing products or services. Internal development is common for growing organizations, particularly when they can exploit existing resources, competencies, and capabilities (leveraging existing resources and other assets).

Internal Ventures

Internal ventures typically set up separate, relatively independent entities (businesses) within the organization. Internal ventures may be most appropriate for products or services that are unrelated to the current products or services. For instance, internal ventures may be appropriate for developing vertically integrated systems. Thus, initial efforts by a hospital to develop home health care may be accomplished through an internal venture.

Reconfiguring the Value Chain

An organization may reconfigure the value chain by changing the activities or sequence of activities it performs and therefore change how value is delivered to the customer.44 Value chain reconfiguration requires rethinking the ways in which existing organizations serve customers. For the most part, reconfiguration takes place in the service delivery components of the values chain (pre-service, service delivery, after-service) and thus is marketing and operations focused.

In many cases reconfiguring the value chain involves using new technology or organizations to perform activities in ways that were not possible in the past.45 For example, using pod casts for physician education by pharmaceutical companies might create a whole new way to provide value to physicians. Therefore, reconfiguration of the value chain is the development of a completely new business model, applying a business model from another industry, or in some cases, a dramatic modification of the existing value chain creating an entirely new way of producing value or lowering costs.

Market entry and penetration strategies coupled with reconfiguring the value chain can be powerful combinations for creating new business models and effectively entering the market. For example, when an organization bypasses brick-and-mortar outlets and sells its products (penetration strategy – channel of distribution) through a website, it is reconfiguring the value chain.46

Market Entry Strategy Linkage

The definition, major advantages, and disadvantages of the market entry strategies are summarized in Exhibit 6–10. The adaptive and market entry strategies work in combination. The market entry strategies are the means for accomplishing the adaptive strategies. This relationship is demonstrated as organizations struggle with cost containment and their managed care strategies. Health care organizations are opting for a variety of adaptive and market entry strategies to deal with the changing health care environment. Together the adaptive (scope of the organization) and market entry strategies (means to achieve that scope) are shaping the health care landscape.

EXHIBIT 6–10 Definition, Advantages, and Disadvantages of Market Entry Strategies

Competitive Strategies

Having selected the adaptive strategies and market entry strategies, managers must decide the strategic posture of the organization and how the products and services will be positioned vis-à-vis those of competitors. Strategic posture concerns the organization's fundamental behavior within the market – defending market position, prospecting for new products and markets, or balancing market defense with careful entry into selected new product areas and markets. In addition, an organization must consciously position its products and services within a market through one of the marketwide or market segment positioning strategies (generic strategies).

Strategic Posture

Organizations may be classified by how they behave within their market segments or industry – their strategic posture. Research by Miles, Snow, Meyer, and Coleman has shown that there are at least four typical strategic postures for organizations – defenders, prospectors, analyzers, and reactors. Defenders, prospectors, and analyzers are explicit strategies that result in a pattern of consistent and stable behavior within a market. Defender, prospector, or analyzer strategic postures may be appropriate for certain internal, market, and environmental conditions. Reactors, on the other hand, do not seem to have a strategy and demonstrate inconsistent behavior; however, unless an organization exists in a protected environment, such as a monopolistic or highly regulated market segment, it cannot continue to behave as a reactor indefinitely.47 Furthermore, an organization's strategic posture should not be left to chance. Health care organizations are able to change their strategic postures to match the demands of their environmental context and improve their performance.48 Therefore, strategic decision makers should examine the current market behavior, explicitly delineate the appropriate organization strategic posture, and redirect resources and competencies needed to transform themselves into a better environmentally suited posture.

Defender Strategic Posture

Stability is the chief objective of a defender strategic posture. Managers using this strategy attempt to seal off a portion of the total market to create a stable domain. A defender posture focuses on a narrow market with a limited number of products or services and aggressively attempts to defend this market segment through pricing or differentiation strategies.

Defenders are organizations that engage in little search for additional opportunities for growth and seldom make adjustments in existing technologies, structures, or strategies. They devote primary attention to improving the efficiencies of existing operations. Thus, cost efficiency is central to the defender's success. In addition, defenders often engage in vertical integration to protect their market, control patient flow, and create stability. Defenders grow through penetration strategies and limited product development strategies.

Prospector Strategic Posture

Prospectors are organizations that frequently search for new market opportunities and regularly engage in experimentation and innovation. A prospector's major capability is that of finding and exploiting new products and market opportunities. As a result, the prospector's domain is usually broad and in a continuous state of development. Prospectors are typically in rapidly changing environments or service categories such as health care technology and frequently engage not only in diversification and product and market development expansion strategies but also divestment and retrenchment strategies. One of the principal competitive advantages of a prospector strategic posture is that of creating change within the service category/service area.

Analyzer Strategic Posture

The analyzer posture is a combination of the prospector and defender strategic postures. The analyzer tries to balance stability and change. Analyzers are organizations that maintain stable operations in some areas, usually their core products or businesses, but also search for new opportunities and engage in market innovations. Characteristically they watch competitors and rapidly adopt those strategic ideas that appear to have the greatest potential. Analyzers tend to use penetration strategies in their stable core products and markets whereas related diversification, product development, and market development are used to enter new promising areas.

Reactor Strategic Posture

The defender, prospector, and analyzer postures are all proactive strategies. However, the reactors really do not have a strategy or plan and therefore such organizations are both inconsistent and unstable in their response to the environment. Reactors are organizations that perceive opportunities and turbulence but are not able to adapt effectively. They lack consistent approaches to strategy and structure and make changes primarily in response to environmental pressures. Miles, Snow, Meyer, and Coleman identified three major reasons that organizations become reactors:

1. Top management may not have clearly articulated the organization's strategy.

2. Management does not fully shape the organization's structure and processes to fit a chosen strategy.

3. Management tends to maintain the organization's current strategy–structure relationship despite overwhelming changes in environmental conditions.49

If the internal analysis reveals that the organization has been reactive without a clear strategy or that there is a mismatch between the strategy and implementation, changes will have to be made to move the organization toward a more effective strategic posture. There is some evidence that reactors may be able to hone their competencies and transform themselves into more viable strategic postures over time.50

Understanding the organization's preferred strategic posture and communicating it throughout the organization provides decision guidelines and will shape the culture of the organization. It is important that the strategic posture be consistent with the directional, adaptive, market entry, and positioning strategies. The definition, major advantages, and disadvantages of the strategic posture strategies are summarized in Exhibit 6–11.

Positioning Strategies – Marketwide or Focus

Michael Porter, a well-known strategic management writer, proposes that an organization may serve the entire market using marketwide strategies or serve a particular segment of the market using focus strategies. Porter called these generic strategies because they were general strategies that any organization could use to position itself in the marketplace.51 For both marketwide and market segment focus there are two fundamental positioning strategies – cost leadership and differentiation.52

Marketwide strategies determine a product or service's place in the market vis-à-vis competitors and position the products/services of the organization to appeal to a broad audience (the entire market). For example, a community hospital may be positioned to serve all area residents – serve a broad market with a broad range of services. These products and services, therefore, are not tailored exclusively to the needs of any special segment of the population such as children or the aged. As shown in Exhibit 6–12, marketwide positioning strategies can be based on differentiation or cost leadership. Thus, the community hospital may try to differentiate itself from other hospitals by emphasizing quality or convenience or may compete as a low-cost provider.

EXHIBIT 6–11 Definition, Advantages, and Disadvantages of Strategic Postures

EXHIBIT 6–12 Porter's Matrix

Source: Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors. Copyright © 1980 by the Free Press. All rights reserved. Reprinted with permission of the Free Press, a division of Simon & Schuster Adult Publishing Group.

Market segment strategies are directed toward the particular needs of a well-defined market segment, such as pediatric oncology or women's health, and often are called focus strategies. Thus, a focus strategy identifies a specific, well-defined “niche” in the total market that the organization will concentrate on or pursue. Because of its attributes, the product or service, or the organization itself, may appeal to a particular niche within the market. Similar to marketwide strategies, focus strategies may be based on cost leadership (cost/focus) or differentiation (differentiation/focus).

Because of the complexity of medicine and the entire health care industry, focus strategies are quite common. Just as physicians have specialized, the institutions within the field have tended to focus on specialized segments. Examples of focus strategies are rehabilitation hospitals, psychiatric hospitals, ambulatory care centers, Alzheimer's centers, and so on. These specialty organizations may be further positioned based on cost leadership or differentiation. Each of the generic strategies results from an organization making consistent choices for product/services, markets (service areas), and distinctive competencies – choices that reinforce each other.

Cost Leadership

Cost leadership is a positioning strategy designed to gain an advantage over competitors by producing a product or providing a service at a lower cost than competitors' offerings. The product or service is often highly standardized to keep costs low. Cost leadership allows for more flexibility in pricing and relatively greater profit margins.

Cost leadership is based on economies of scale in operations, marketing, administration, and the use of the latest technology. Cost leadership may be used effectively as the generic strategy for any of the adaptive strategies and seems particularly applicable to the primary providers segment of the health care industry. As Porter suggests:

Cost leadership requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reduction from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas such as R&D, service, sales force, advertising, and so on.53

Therefore, in order to use cost leadership effectively, an organization must be able to develop a significant cost advantage and have a reasonably large market share. However, low cost is only an advantage if the organization has the lowest cost and competitors know they cannot match it. Sustaining lowest cost is extremely difficult to achieve without extraordinary scale or market share advantages or unique factor cost benefits.54 Such a strategy must be used cautiously within health care because consumers often perceive low price as meaning low quality. However, cost leadership allows the organization the greatest flexibility in pricing.

An industry segment where cost leadership is being used successfully is in the area of long-term care. Long-term care facilities are a “thin-margin business” in which profit margins range from approximately 1.2 percent to 1.7 percent. However, long-term care facilities that have been able to drive costs down while maintaining quality have enjoyed higher margins. In addition, many of these facilities have been upgraded to be more efficient and have instituted tight cost controls. Advertising has been used to keep occupancy above 95 percent, which is often required in the industry to be profitable.

Differentiation

Differentiation is a strategy to make the product or service different (or appear so in the mind of the buyer) from competitors' products or services. Thus, consumers see the service as unique among a group of similar competing services. Differentiation is of no benefit unless that difference is both valuable to buyers and capable of being sustained against competitors.55

The product or service may be differentiated by emphasizing quality, a high level of service, ease of access, convenience, reputation, and so on. There are a number of ways to differentiate a product or service, but the attributes that are to be viewed as different or unique must be valued by the consumer. Therefore, organizations using differentiation strategies rely on brand loyalty (reputation or image), distinctive products or services, and the lack of good substitutes.

The most common forms of differentiation in the health care industry have been based on quality and image. Many acute care hospitals emphasize and promote quality care to differentiate them from other hospitals in their service area. However, consumers expect to receive high-quality care at every hospital, making quality a difficult differentiating factor. A “high-tech” image is another basis for differentiation among health care organizations. Affiliation with a medical school – which performs the most sophisticated procedures or uses the latest (often expensive) technology – may promote the image of “the best possible care.” Exhibit 6–13 presents the definition, advantages, and disadvantages of each of the positioning strategies.

Combination Strategies

Combination strategies are often used, especially in larger complex organizations, because no single strategy alone may be sufficient. Zook and Allen have observed that “…profitable growth comes when a company pushes out the boundaries of its core business into adjacent space.”56 They identified several ways to grow into an adjacent space – expand along the external value chain (penetration), grow new products and services (product development), enter new geographies (market development), and address new customer segments (market development). Therefore, successful strategies often mix and match approaches, deploying strategies simultaneously or sequentially. For example, an organization may concurrently divest itself of one of its divisions and engage in market development in another. Perhaps the most frequent combination strategy for hospital-based systems has been vertical integration through acquisition and alliances combined with market development through acquisition (horizontal integration). The intent of these strategies has been to create regional, fully integrated systems with wide market coverage and a full range of services (often referred to as providing the continuum of care).

EXHIBIT 6–13 Definition, Advantages, and Disadvantages of Positioning Strategies

PERSPECTIVE 6–5 Integration at Carolinas Healthcare System

Carolinas Healthcare System (CHS), the largest system in the Carolinas and the second largest system in the nation, is overseen by the Charlotte/Mecklenburg Hospital Authority. An outgrowth of a lone community hospital originally founded in 1940, CHS provides a full spectrum of health care and wellness programs throughout North and South Carolina (and one hospital in Georgia). It is a diverse network including academic medical centers, hospitals, health care pavilions, physician practices, destination centers (such as cancer, outpatient surgery, imaging, endoscopy, and so on), surgical and rehabilitation centers, home health agencies, nursing homes, and hospice and palliative care. In 2011, CHS had 29 disease-specific certifications awarded by the Joint Commission.

CHS's flagship facility is the 874-bed Carolinas Medical Center (CMC), which includes a Level 1 trauma center, a research institute, the Levine Children's Hospital, a rehabilitation facility, and a large number of special treatment units including heart, cancer, and organ transplant. CMC serves as one of North Carolina's five Academic Medical Center Teaching Hospitals providing residency training and fellowships for 377 physicians in 15 specialties.

Carolinas Healthcare System's total revenue grew 500 percent between 2000 and 2012. In 2011, CHS built six new free-standing emergency departments, a new replacement hospital in Wadesboro, NC, and spent $12.3 million on the first phase of a virtual critical care program. CHS has 457 intensive care unit (ICU) beds and 52 board-certified critical care physicians (28 of them located at the main CMC hospital in Charlotte). With this new system, critical care specialists will be able to monitor ICU patients at any of the CHS facilities.

CMC is the first hospital in North Carolina to be recognized by J. D. Power and Associates for excellence in maternity care, and has been recognized for emergency services and women's services as well. CMC has been named the “Consumer Choice Preferred Hospital” in the Charlotte market by the National Research Corporation 14 times, and US News & World Report named CMC in its ranking of “America's Best Hospitals” for urology and orthopedics in 2008. In 2011, US News & World Report listed Levine Children's Hospital among America's Best Children's Hospitals for kidney care. In 2008, CMC won the Joint Commission's Ernest Amory Codman Award (hospital category) because of its achievement in the use of process and outcomes measures to improve organization performance and, ultimately, the quality and safety of care. In 2009, CMC received the Joint Commission's Franklin Award of Distinction for Clinical Care Management.

As of July 1, 2012 (when a management agreement with Cone Health became effective), CHS owned or managed nearly 40 hospitals, garnered about $8 billion in annual revenue, employed or managed more than 57,400 employees, and owned or managed 7,200 licensed beds. Further, CHS employed or managed more than 2,000 physicians and served patients from more than 700 care locations.

Over the past 70-plus years, CHS has incorporated every type of growth strategy and most of the maintenance of scope strategies; however, they have rarely used any of the reduction of scope strategies.

  Source: Carolinas Healthcare Systems Annual Report 2011, its website, and news releases.

As illustrated in Perspective 6–5, Carolinas Healthcare System, previously known as Charlotte/Mecklenburg Hospital Authority, demonstrates the successful use of combination strategies. Beginning with a single county hospital as the base, Carolinas Healthcare System used practically every type of adaptive and market entry strategy to achieve its vision of a fully integrated regional health system with Carolinas Medical Center as its foundation.

In addition to an organization using several different strategies at once, a strategy may have several phases. It may be necessary to “string together” several strategic alternatives as phases or elements to implement a broader strategic shift. In a two-phase strategy, an organization may employ a retrenchment strategy in phase one and an enhancement strategy in phase two. As illustrated in Exhibit 6–14, the strategic manager's vision often extends through several strategic alternatives or phases. Such vision helps to provide long-term continuity for the entire management team. However, the strategic manager must be aware that, in a dynamic environment, circumstances may change and later phases may have to be modified or revised to meet the needs of the unique and changing situation. Strategic management is a continuous process of assessment and decision making.

The decision logic for the formulation of the strategic plan was illustrated in Exhibit 6–2. At this point, it would be useful to return to Exhibits 6–2 and 6–4 to review the complete strategy formulation process. After all the strategy formulation alternatives have been selected, creation of a strategy map showing the selected directional, adaptive, market entry, and competitive strategies together will help to ensure their consistency and fit. However, it is not enough to know the strategic logic and range of strategic alternatives. The strategic alternative (or set of alternatives) should be selected that best meets the requirements of the external environment, strengths and weaknesses of the organization, and the directional strategies. Chapter 7 will discuss methods for evaluating the strategic alternatives presented in this chapter.

EXHIBIT 6–14 Vision of Strategy Combinations and Phases

Lessons for Health Care Managers

To understand the decisions that have to be made in strategy formulation, a strategic thinking map depicting a hierarchy of strategic alternatives is useful. There are several types of strategies, and within each type, several strategic alternatives are available to health care organizations. In addition, there is a general sequential decision logic in the strategy formulation process. First, directional strategies must be articulated through the organization's mission, vision, values, and goals. Second, adaptive strategies are identified, evaluated, and selected. The adaptive strategies are central to strategy formulation and delineate how the organization will expand, reduce, or maintain the scope of operations. Expansion strategies include diversification, vertical integration, market development, product development, and penetration. Reduction strategies include divestiture, liquidation, harvesting, and retrenchment. Finally, maintenance of scope strategies includes enhancement and status quo.

The third type of strategic decision concerns the market entry strategies. Expansion and maintenance of scope strategies call for a method to carry out the strategy in the marketplace. Therefore, some method for entering or gaining access to that market is required. Market entry strategies include acquisitions and mergers, internal development, internal ventures, reconfiguring the value chain, alliances and joint ventures, licensing, and venture capital investments. Any of the market entry strategies may be used to carry out an expansion or maintenance of scope adaptive strategy.

The fourth category of strategy includes the competitive strategies. Competitive strategies specify strategic posture of the organization and position the products and services vis-à-vis competitors. The strategic posture should be well thought through by strategic leadership. Strategic posture specifies the organization/market relationship and provides decision and culture guidelines for management. Strategic postures that may be adopted by an organization include defender, analyzer, prospector, or reactor (although the latter usually indicates the lack of a strategy). In addition, there are the positioning strategies (often called generic strategies). These include cost leadership and differentiation, both of which can be applied as marketwide strategies or focus strategies (a market segment strategy). Each of the generic strategies places different demands on the organization and requires unique resources, competencies, and capabilities.

The strategy formulation decision logic provides a sequence for making the strategic decisions. However, the selected strategic alternatives must be viewed together to ensure their fit and consistency. In addition, it is unlikely that a single strategy will suffice for an organization. Several strategic alternatives may have to be adopted and used in combination. For instance, one service category may require market development whereas a different service category may require harvesting. One division may be a defender positioned as a cost leader and another may be a prospector pursuing differentiation. Furthermore, several strategic alternatives may be seen as phases or sequences in a broader strategic shift. Chapter 7 presents several frameworks to help managers think about which strategic alternatives are most appropriate given the organization's external environmental issues, competitive advantages and disadvantages, and directional strategies.

Health Care Manager's Bookshelf

Jack Trout with Steve Rivkin, Differentiate or Die: Survival in Our Era of Killer Competition (New York: John Wiley & Sons, 2001)

Customers have more choices than ever before. For example, in 1970 there were less than 20 over-the-counter pain relievers. Today there are more than 140. In 1970 there were no websites. Today there are almost 5 million.1 The story is not so different in health care. In the early 1970s there was one type of contact lens. Today there are 36. In the “old days” when considering health care, the typical patient thought about a doctor, the local hospital, and a single insurer such as Blue Cross. Today, Cigna, Kaiser, Medicare, and Medicaid may be important parts of the health care equation. Despite the concentration in pharmaceuticals, doctors also have a greater number of choices, generic and brand name, when prescribing drugs for high blood pressure, high cholesterol, or chronic headaches (p. 6). In 1970 there were about 6,000 prescription drugs. Now there are more than 7,500. How do organizations and individuals survive and prosper in an era of killer competition with all these choices? One way is to create “blue oceans” and simply not compete or make the competition irrelevant. More often there are a group of competitors who cannot be ignored or marginalized.

A strategy for surviving in an era of killer competition, according to these authors, is to overcome the temptation to be everything to everyone. Being different is much more important today than it was 30 years ago (p. 13). Strategic leaders cannot ignore the importance of uniqueness. Chevrolet tried to appeal to everyone and, as a result, the company lost its “difference” along with its loyal customers.

The central thesis of Differentiate or Die is that anything can be differentiated, even health services. However, be careful not to try to differentiate by just being creative, cheap, patient-oriented, or quality-driven. Competitors read the same books you do and can learn to do these things equally well.2 The real key is to create uniqueness.

Consider, for example, boutique doctor practices. Many affluent health care consumers have lost “patience” with mass production medicine where people travel to the doctor's office only to find a crowded waiting room or call the doctor's answering service at night and hope in vain for a follow-up phone call. A solution, for those who can afford it, is to purchase concierge care and “retain” their physician by paying an annual fee in addition to fees for services to ensure that their doctor has a limited number of patients they agree to see on an as-needed basis. These retainers range from $1,000 to $20,000 per year.

Concierge care can be used to demonstrate the steps to differentiation. First, the concept must make sense in the business context (p. 67). As personal health services become more bureaucratic and cumbersome people begin to look for alternatives. Personalized health service rings a bell with frustrated health care consumers. Second, the impersonality of the practice of medicine that accompanies patient panels of 2,500 to 3,000 patients begins to stimulate an entrepreneurial search for a differentiating idea (p. 67). Third, a select number of qualified providers with appropriate credentials propose to limit their practice to 600 to 800 patients and provide personalized services to those willing to pay an annual fee in addition to normal charges for services provided. Finally, the providers effectively communicate the merits of boutique medicine to the market segment with the financial resources necessary to afford these services. The bottom line is that “you cannot over communicate your difference” (p. 69).

Making a service different involves sacrifice. To target a particular market segment it is necessary to sacrifice other market segments (p. 179). A physician's practice cannot be both a concierge provider and a high-volume producer. If it tries, it is likely to be unsuccessful in both undertakings.

REFERENCES

1. Jack Trout with Steve Rivkin, Differentiate or Die: Survival in Our Era of Killer Competition (New York: John Wiley & Sons, 2001).

2. Rhiema Acosta, “Differentiate or Die: Survival in Our Era of Killer Competition,” Quality Management Journal 9, no. 4 (2002), pp. 75–76.

KEY TERMS AND CONCEPTS IN STRATEGIC MANAGEMENT

Acquisition

Adaptive Strategy

Alliance

Analyzer Strategic Posture

Backward Vertical Integration

Combination Strategy

Competitive Strategy

Concentric Diversification

Conglomerate Diversification

Cooperation Strategy

Cost Leadership

Defender Strategic Posture

Development Strategy

Differentiation

Diversification

Divestiture

Ends–Means Chain

Enhancement

Expansion of Scope Strategy

Focused Factory

Focus Strategy

Forward Vertical Integration

Generic Strategy

Harvesting

Horizontal Integration

Implementation Strategy

Internal Development

Internal Venture

Joint Venture

Licensing

Liquidation

Maintenance of Scope Strategy

Market Development

Market Entry Strategy

Marketwide Strategy

Merger

Penetration Strategy

Positioning Strategy

Product Development

Prospector Strategic Posture

Purchase Strategy

Reactor Strategic Posture

Reconfigure the Value Chain

Reduction of Scope Strategy

Related Diversification

Retrenchment

Status Quo

Strategic Posture

Strategy Formulation

Unrelated Diversification

Venture Capital Investment

Vertical Integration

Questions for Class Discussion

1. What four types of strategy make up the strategy formulation process? Describe the role each plays in developing a strategic plan.

2. Why are the directional strategies both a part of situational analysis and a part of strategy formulation?

3. How is strategy formulation related to situational analysis?

4. Name and describe the expansion, reduction, and maintenance of scope strategies. Which of the adaptive strategies are corporate and which are division level? Under what conditions may each be appropriate?

5. Why does the selection of the strategic alternatives create “direction” for the organization?

6. What is the difference between related diversification and product development? Provide examples of each.

7. What is a market-driven or focused factory strategy? Identify some organizations that have employed this type of market development strategy.

8. Many health care organizations have engaged in vertical and horizontal integration. What is the rationale for these strategies?

9. Describe vertical integration in terms of patient flow.

10. Explain the difference between an enhancement strategy and a status quo strategy.

11. How is market development different from product development? Penetration? Provide examples of each.

12. Compare and contrast a divestiture strategy with a liquidation strategy.

13. Which of the market entry strategies provides for the quickest entry into the market? Slowest?

14. What is strategic posture? How does a decision concerning the strategic posture help create decision guidelines for management and affect the organization's culture?

15. Explain Porter's generic strategies. How do they position the organization's products and services in the market?

16. How might a retrenchment strategy and a penetration strategy be linked together? What are some other logical combinations of strategies? How may a combination of strategies be related to vision?

Notes

1. Warnock Davies, “Understanding Strategy,” Strategy & Leadership 28, no. 5 (September–October 2000), pp. 25–30.

2. Richard Farson, Management of the Absurd (New York: Simon & Schuster, 1996), p. 21.

3. For example, see John C. Peirce, “The Paradox of Physicians and Administrators in Health Care Organizations,” Health Care Management Review 25, no. 1 (winter 2000), pp. 7–28; John D. Blair and G. Tyge Payne, “The Paradox Prescription: Leading the Medical Group of the Future,” Health Care Management Review 25, no. 1 (winter 2000), pp. 44–58; G. Tyge Payne, John D. Blair, and Myron D. Fottler, “The Role of Paradox in Integrated Strategy and Structure Configurations: Exploring Integrated Delivery in Health Care,” in John D. Blair, Myron D. Fottler, and Grant T. Savage (eds), Advances in Health Care Management (New York: Elsevier Science, 2000), pp. 109–141.

4. Roger Martin, “How Successful Leaders Think,” Harvard Business Review 85, no 6 (June 2007), pp. 60–67.

5. Jay Greene, “Diversification, Take Two,” Modern Healthcare 23, no. 28 (1993), pp. 28–32. See also Shao-Chi Chang and Chi-Feng Wang., “The Effect of Product Diversification Strategies on the Relationship between International Diversification and Firm Performance,” Journal of World Business, 42, no. 1 (2007), pp. 61–79.

6. Leslie E. Palich, Laura B. Cardinal, and C. Chet Miller, “Curvilinearity in the Diversification–Performance Linkage: An Examination of Over Three Decades of Research,” Strategic Management Journal 21, no. 2 (February 2000), pp. 155–174.

7. Palich, Cardinal, and Miller, op. cit. and Michael S. Gary, “Implementation Strategy and Performance Outcomes in Related Diversification,” Strategic Management Journal 262 (2005), pp. 643–664.

8. Myron D. Fottler, Grant T. Savage, and John D. Blair, “The Future of Integrated Delivery Systems: A Consumer Perspective,” in John D. Blair, Myron D. Fottler, and Grant T. Savage (eds), Advances in Health Care Management (New York: Elsevier Science, 2000), pp. 15–32.

9. Ibid.

10. http://www.aha.org/research/rc/statstudies/fast, 2012.

11. Gloria J. Bazzoli, Benjamin Chan, Stephen M. Shortell, and Thomas D'Aunno, “The Financial Performance of Hospitals Belonging to Health Networks and Systems,” Inquiry 37, no. 3 (2000), pp. 234–252; Manohar Singh, Ali Nejadmalayeri, and Ike Mathur, “Performance Impact of Business Group Affiliation: An Analysis of the Diversification–Performance Link in a Developing Economy,” Journal of Business Research 60, no. 4 (2007), pp. 339–347.

12. VHA, Inc. and Deloitte & Touche LLP, Provider 2020: Strategies for Differentiation in an Uncertain Environment (Irving, TX and Detroit, MI: VHA, Inc. and Deloitte & Touche, LLP, 2012), pp. 1–9.

13. Stephen S. Mick and Douglas A. Conrad, “The Decision to Integrate Vertically in Health Care Organizations,” Hospital & Health Services Administration 33, no. 3 (fall 1988), p. 352. See also Frank T. Rothaermel, Michael A, Hitt, and Lloyd A. Jobe, “Balancing Vertical Integration and Strategic Outsourcing: Effects on Product Portfolio, Product Success, and Firm Performance,” Strategic Management Journal 27, no. 4 (2006), pp. 1033–1056.

14. Fottler, Savage, and Blair, “The Future of Integrated Delivery Systems,” p. 18.

15. Regina E. Herzlinger, Market-Driven Health Care: Who Wins, Who Loses in the Transformation of America's Largest Service Industry (Reading, MA: Addison-Wesley Publishing Company, 1997), p. xxi.

16. “Do Specialty Hospitals Promote Price Competition?” Medical Benefits 23, no. 3 (2006), pp. 3–4.

17. http://www.pharmaceutical-market-research.com/publications/sales_marketing/e_detailing_trends.html and Banerjee and Sampada Kumar Dash, “Effectiveness of E-Detailing As An Innovative Pharmaceutical Marketing Tool in Emerging Economies: Views of Health Care Professionals in India,” Journal of Medical Marketing: Device, Diagnostic, and Pharmaceutical Marketing 11, no. 3 (2011), pp. 204–214.

18. Mick and Conrad, “The Decision to Integrate Vertically,” p. 348.

19. Donald N. Sull, “Strategy as Active Waiting,” Harvard Business Review 83, no. 9 (2005) p. 129; Don Moyer, “Active Waiting,” Harvard Business Review 85, no. 7/8 (2007), p. 196.

20. Larry Selden and Geoffrey Colvin, “M&A Needn't Be a Loser's Game,” Harvard Business Review 81, no. 6 (2003), p. 75.

21. Dennis Carey (Moderator), “A CEO Roundtable on Making Mergers Succeed,” Harvard Business Review 78, no. 3 (May–June 2000), pp. 145–154.

22. Bazzoli, Chan, Shortell, and D'Aunno, “The Financial Performance of Hospitals Belonging to Health Networks and Systems,” pp. 234–252.

23. California Health Care Foundation, http://www.chcf.org/California Facts and Figures, 2012.

24. Jeffrey F. Allen, “Franchise Issues – Exclusivity of Territory,” Inquiry 39, no. 1 (2000), pp. 8–11.

25. Ibid.

26. Edward B. Roberts and Charles A. Berry, “Entering New Businesses: Selecting Strategies for Success,” Sloan Management Review 25 (spring 1985), p. 7.

27. http://www.entrepreneurship.org/en/resoursecenter/venture capital investment in health care and http://www.medcitynews.com/2011.

28. Sharon Roggy and Ron Gority, “Bridging the Visions of Competing Catholic Health Care Systems,” Health Care Strategic Management 11, no. 7 (1993), pp. 16–19.

29. Thomas P. Weil, “Management of Integrated Delivery Systems in the Next Decade,” Health Care Management Review 25, no. 3 (summer 2000), pp. 9–23.

30. Ibid.

31. Howard S. Zuckerman and Arnold D. Kaluzny, “Strategic Alliances in Health Care: The Challenges of Cooperation,” Frontiers of Health Services Management 7, no. 3 (1991), p. 4.

32. Michael E. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990), p. 65.

33. Seungwha (Andy) Chung, Harbir Singh, and Kyungmook Lee, “Complementarity, Status Similarity, and Social Capital as Drivers of Alliance Formation,” Strategic Management Journal 21, no. 1 (January 2000), pp. 1–22.

34. Toby E. Stuart, “Interorganizational Alliances and the Performance of Firms: A Study of Growth and Innovation Rates in a High-Technology Industry,” Strategic Management Journal 21, no. 8 (August 2000), pp. 791–811.

35. Joel A. C. Baum, Tony Calabrese, and Brian S. Silverman, “Don't Go It Alone: Network Composition and Startups' Performance in Canadian Biotechnology,” Strategic Management Journal 21, no. 3 (March 2000), pp. 276–294.

36. Leonard H. Friedman and James B. Goes, “The Timing of Medical Technology Acquisition: Strategic Decision Making in Turbulent Environments,” Journal of Healthcare Management 45, no. 5 (September–October 2000), pp. 317–330.

37. Sandra Pelfrey and Barbara A. Theisen, “Joint Ventures in Health Care,” Journal of Nursing Administration 19, no. 4 (April 1989), p. 39.

38. Lawton R. Burns, Gloria J. Bazzoli, Linda Dynan, and Douglas R. Wholey, “Impact of HMO Market Structure on Physician–Hospital Strategic Alliances,” Health Services Research 35, no. 1 (April 2000), pp. 101–132; Michael A. Morrisey, Jeffery Alexander, Lawton R. Burns, and Victoria Johnson, “The Effects of Managed Care on Physician and Clinical Integration in Hospitals,” Medical Care 37, no. 4 (1999), pp. 350–361.

39. Roberts and Berry, “Entering New Businesses,” p. 6.

40. Pelfrey and Theisen, “Joint Ventures in Health Care,” pp. 39–41.

41. Ibid., p. 42.

42. Robert Pitts and David Lei, Strategic Management: Building and Sustaining Competitive Advantage, 3rd edn (Mason, OH: Thomson Southwestern, 2003), p. 346.

43. James Bamford, David Ernst, and David G. Fubini, “Launching a World-Class Joint Venture,” Harvard Business Review 82, no. 2 (2004), pp. 90–100.

44. David J. Bryce and Jeffrey H. Dyer, “Strategies to Crack Well-guarded Markets,” Harvard Business Review 85, no. 5 (May 2007), pp. 84–92.

45. Ibid., p. 91.

46. Ibid., pp. 87–88.

47. Raymond E. Miles, Charles C. Snow, Alan D. Meyer, and Henry J. Coleman Jr., “Organizational Strategy, Structure, and Process,” Academy of Management Review 3, no. 3 (1978), pp. 546–562.

48. Monique Forte, James J. Hoffman, Bruce T. Lamont, and Erich N. Brockmann, “Organizational Form and Environment: An Analysis of Between-Form and Within-Form Responses to Environmental Change,” Strategic Management Journal 21, no. 7 (July 2000), pp. 753–773.

49. Miles, Snow, Meyer, and Coleman Jr., “Organizational Strategy, Structure, and Process,” pp. 546–562.

50. Forte, Hoffman, Lamont, and Brockmann, “Organizational Form and Environment,” pp. 753–773.

51. For a review of research on Porter's generic strategies, see Colin Campbell-Hunt, “What Have We Learned About Generic Competitive Strategy? A Meta-Analysis,” Strategic Management Journal 21, no. 2 (February 2000), pp. 127–154.

52. Michael E. Porter, Competitive Strategy (New York: Free Press, 1980), p. 35.

53. Ibid.

54. George Yip and Gerry Johnson, “Transforming Strategy,” Business Strategy Review 18, no. 1 (spring 2007), p. 12.

55. Ibid., p. 13.

56. Chris Zook and James Allen, “Growth Outside the Core,” Harvard Business Review 81, no. 12 (2003), pp. 66–73.

(Ginter 205)

Ginter, Peter M. The Strategic Management of Health Care Organizations, 7th Edition. John Wiley & Sons UK, 2013-03-11. VitalBook file.