Human resources homework

Strategic Alliances

Chapter Objectives

After reading this chapter, you should be able to

1. Describe strategic alliances, the roles of various alliances in healthcare, and the reasons they form.

2. Create an effective alliance-building and alliance-sustaining process.

3. Evaluate the benefits of alliances and overcome the problems associated with them.

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Strategic Alliances Chapter 8

As the complexity of the healthcare environment continues to rise, healthcare managers look for ways to respond. One important option healthcare managers frequently consider is whether to form strategic alliances with other organizations. In general terms, a strategic alliance is a formal arrangement or agreement among two or more organizations that provides a common organizational strategy that can be shaped to best suit the needs of its members and enhance their levels of performance. These formal relationships strengthen an organization’s ability to cope with various circumstances and often lead to improved levels of efficiency and effectiveness by the member organizations (Olden, Roggenkamp, & Luke, 2002). Such alliances take a variety of forms, as will be described in this chapter.

The Premier organization (http://www.premierinc.com) is an example of a major alliance that oversees the collaborative efforts of more than 2,700 member hospitals and health systems and includes more than 90,000 additional healthcare sites. Among the alliance benefits that Premier promotes are a comprehensive database system of patient records, information about best prac- tices, and cost-reduction strategies. The database system contains information regarding 25% of discharges in the United States, 2.5 million real-time and daily clinical transactions, and approxi- mately $43 billion in annual purchasing data. According to Premier, the system helps improve the quality of medical outcomes for organizational members, while also safely reducing costs. Premier’s alliance works toward improving the performance in the following areas of hospitals and other healthcare facilities:

• Supply chain • Quality • Safety • Labor • Population management • Pharmacy • Insurance • Services and programs • Collaborating for results • Influencing policy • Revolutionizing technology

In the Premier strategic alliance, member organizations can reduce costs by taking advantage of this database. Members also may be able to increase revenues by the prestige associated with belonging to the Premier alliance.

As this chapter describes, various healthcare organizations can enjoy the benefits of alliances like Premier, though they must also have thoughtful strategic management in order to succeed.

The first section of this chapter outlines the basic purposes of strategic alliances, such as the one maintained by Premier. Next, the chapter describes the major types or forms of alliances. The third section explains how these alliances are formed, built, and sustained over time and discusses the nature of governance within them. Finally, the chapter looks at tactics designed to overcome problems associated with strategic alliances and methods used to take advantage of their benefits.

Types and Purposes of Strategic Alliances Chapter 8

8.1 Types and Purposes of Strategic Alliances Strategic alliances form for many reasons. Among the more common reasons, factors present in turbulent environments (Shortell & Zajac, 1990), or environmental “jolts” (Meyer, 1982), seem to be the most prevalent. In essence, alliances form to assist organizations in dealing with uncer- tainty; to help individual organizations cope with risk; and to take advantage of various opportu- nities to cut costs and increase revenues.

Types of Alliances

Alliances, or business coalitions, serve a variety of purposes in healthcare. Differing forms of alliances emerge, depending on environmental circumstances and organizational needs. Three sets of healthcare entities join alliances: (1) suppliers, (2) healthcare organizations and providers, and (3) consumers, including patients and other buyers, such as employers (Doz & Hamel, 1998). Figure 8.1 identifies some potential strategic alliance relationships.

Supplier Alliances with Other Suppliers In healthcare settings, suppliers offer various products that are part of patient diagnosis and treatment. Three primary suppliers are medicinal companies (pharmaceuticals); medical device and equipment manufacturers; and firms that offer medical supplies, such as alcohol, hydrogen peroxide, bandages, and surgical glue. The suppliers of medical products often form two types of coalitions. The first is with other suppliers, and the second is with other medical organizations— notably, providers.

Sometimes, major pharmaceutical companies find an alliance to be valuable in developing vari- ous medicines or drugs or assisting to bring them to market. Currently, such limited partnerships

Figure 8.1 Potential strategic alliance relationships

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Health care organizations/providers

Supplier

Consumers and buyers

Other health care organizations/providers

Consumers and buyers

Other consumers and buyers

Other suppliers

Health care organizations/providers

Types and Purposes of Strategic Alliances Chapter 8

tend to form between major pharmaceutical companies and biomedical and biotechnology orga- nizations. This type of alliance occurs when one organization offers a product that meshes well with the knowledge or expertise of another organization. For example, a biomedical company that has finalized the development of a new drug might benefit from an alliance with a pharma- ceutical company that has expertise in commercializing new medicines. A second example is when a manufacturer of medical equipment requires a unique type of expertise, such as in digital technology. For this firm, an alliance with a biotechnology company could yield a new medical device that uses the most current technological advances. The two companies would jointly share in development of the product and subsequent revenues produced by its introduction into the marketplace. Eli Lilly and Company has been at the forefront of this type of strategic alliance. As the company’s website notes, Eli Lilly’s alliance group has evolved into a full-service organization that “excels at problem solving and value-chain integration at all stages of discovery, develop- ment, and commercialization” (Eli Lilly and Company, n.d.).

A second form of supplier alliance occurs, for example, when a medical device is required to deliver a specific drug—for example, for patients who receive medicines through intravenous solutions, implants, or some other innovative medical instrument. The management team of a pharmaceutical company that produces such intravenous solutions may decide to form an alli- ance with a medical device manufacturer to develop a specific delivery system for the company’s product. The pharmaceutical company benefits from improved satisfaction with its product, as well as a potential increase in sales as word spreads regarding the ease of use of the new delivery system; in turn, the medical device manufacturer experiences increased revenues from sales of the delivery system.

Supplier Alliances with Healthcare Organizations and Providers Innovations in healthcare do not always come from manufacturing, pharmaceutical, biomedical, or biotechnology organizations. At times, an invention originates in the operating room or in a hospital laboratory. When a physician or medical professional in a hospital or provider organiza- tion develops an improvement on a medical procedure or conceptualizes how a medical device might make an operation more successful, that information may be passed along so that the innovation can be developed. Often, the net result is an alliance between the inventor and a manufacturing organization.

A second source of this type of alliance can be found in major research universities. Some uni- versities offer medical school programs, whereas others engage in research related to medical care without a physician-teaching facility. In either case, a pioneering researcher may discover a chemical solution or medical instrument that has value for physicians and hospitals. That indi- vidual probably does not have access to marketing techniques or may find it useful to tap into the expertise of some other supplier. The outcome can be an alliance between the individual’s academic institution and the supplier organization. The alliance would lead the supplier organi- zation to experience increased revenues through such mechanisms as sharing royalty fees paid to the academic institution for use of the innovation that the supplier organization marketed.

Healthcare Organization and Provider Alliances Linkages between various types of providers represent a normal part of the functioning of hospi- tals, pharmacies, clinics, and individual physician practices. Bonds between hospitals and physi- cians typify the industry (Burns & Muller, 2008). Various specialists create relationships with hospitals through visiting privileges and in other ways. Through health maintenance organiza- tion and preferred provider organization arrangements, groups of physicians form alliances with

Types and Purposes of Strategic Alliances Chapter 8

hospitals, allowing for shared billing practices and other effi- ciencies. For example, a visiting surgeon allied with a hospi- tal obtains access to the hospital’s operating room and skilled assisting professionals. Similarly, a psychiatrist who main- tains a separate office may also, through an alliance, oversee care for those afflicted by mental health emergencies.

Another common provider alliance takes place when a hospital offers both emergency room care and a walk-in or retail clinic. The facility allows for more efficient treatment of patients who require the care of a physician but not in an emergency room setting. Those with more dramatic health problems are either referred to the emergency room or admitted to the hospital itself. In essence, the walk-in clinic serves as a screening device and as a feeder organization to the hospital.

In other settings, pharmacies establish alliances with hospi- tals and walk-in clinics. A patient who has been treated in an emergency room or walk-in clinic but who is now ready to go home, save for needing a prescription, enjoys the conve- nience of an on-site pharmacy.

Consumer or Buyer with Provider Alliances In some circumstances, sets of patients or buyers enter into strategic alliances. As an example, the support staff and others in a walk-in clinic might have an agreement to receive on-site health- care as part of an employment agreement with the clinic. More formal agreements between managed-care units and hospitals may also be generated, creating a patient (buyer)–to–provider (hospital) alliance.

Buyers with Buyers Alliances Individual consumers or buyers are also able to form certain types of alliances with healthcare providers and with each other through strategic alliance contracts. Employers can, for instance, generate contracts with pharmacies to improve the prices that their employees pay for medicines. Employers also enter into contracts with insurance providers to create a healthcare insurance system for employees. Any managed-care contract creates alliances among buyers so that they can obtain access from healthcare providers.

In summary, the three main entities in the healthcare system—those that supply medical items, those that provide medical care, and those that purchase the care—can form alliances within and between categories. Such arrangements occur when the terms of the strategic alliance benefit all of the parties concerned.

Purposes of Alliances

The purpose of forming a strategic alliance is the same for a healthcare organization as it is in any other business entity. Organizations join strategic alliances because they recognize the value of alliances in fostering flexibility and generating access to resources and markets (Berry, 2006). Another way to put it is that strategic alliances “are designed to achieve strategic purposes not

© Andy King/Associated Press/JUNE 23, 2005 FILE PHOTO

▲▲ Walk-in clinics often support emergency care facilities and provide patients to hospitals.

Types and Purposes of Strategic Alliances Chapter 8

attainable by a single organization, providing flexibility and responsiveness while retaining the basic fabric of participating organizations” (Kaluzny, Zuckerman, & Ricketts, 2009).

Larger organizations entering new markets obtain access to local knowledge through alliances with organizations in the community. For example, a major hospital’s executive team may con- sider the possibility of creating a relationship with a small hospital in a nearby community. The management team of the smaller facility would have the best understanding of local conditions, such as the quality of the ambulance and emergency response system, the physicians with the best reputations in individual specialties, and the food service company that would best serve the needs of the community. Furthermore, with such an alliance, connections could be made between the larger hospital and local city leaders. If the larger organization held magnet hospital status, which means it has excellent patient outcomes, high levels of satisfaction among nurses, and low turnover in the nursing staff, then this strong, positive reputation would be a benefit to the status of the local hospital. The Premier alliance described at the beginning of this chapter contains many organizations with magnet hospital status.

Smaller organizations are also able to take advantage of network ties outside their traditional boundaries to reach additional sources of materials, capital, and expertise (Barry, 2006). Strategic alliances can accomplish more than helping a healthcare organization manage a difficult opera- tional period or resolve a pressing problem. They have also been incorporated into the healthcare field because such alliances help participating organizations deal with continuous change and unpredictable developments. Four areas in which a strategic alliance assists a healthcare provider in staying timely and competitive are:

• Financial resources and support • Research and development • Risk sharing • Information sharing and collective action

Financial Resources and Support In many of the alliances noted in the previous section, one primary objective is to gain a finan- cial advantage, whether by cutting costs or by increasing revenues. In the most ideal of circum- stances, both objectives are accomplished at the same time.

Alliances cut costs when efficiencies accrue across activities. When various healthcare provid- ers join forces, the organizations can share the costs of major technologies, such as diagnos- tic equipment, surgical rooms, office space, and other major purchases. In addition, these same organizations can reduce payroll costs by combining their billing and scheduling departments. They could also work together to provide services, such as nursing and routine medical testing, in which a physician is not required (e.g., drawing blood, taking X-rays, and administering some health tests). Hospitals that join with others in strategic alliances can also increase their revenues and become more cost-effective by providing complementary specialties without overlapping.

For alliances among buyers, costs are reduced across pools of consumers (patients). For example, employers who have alliances with major health insurers can spread the costs of the most expen- sive care among a larger number of policyholders, reducing the costs to the company’s employees when they purchase health insurance.

An additional form of cost reduction occurs when a strategic alliance exists between a manufac- turer and its customers. For example, a magnetic resonance imaging device developed by a major

Types and Purposes of Strategic Alliances Chapter 8

corporation, such as General Electric, can be sold to hospitals, physician groups, and government organizations that have a service-agreement alliance. According to this agreement, members of the alliance will automatically receive upgrades to the device, along with other servicing activi- ties, as they become available. In addition, the hospital or provider can lower the cost of service calls, and the manufacturer can maintain a client base. At times, the hospital or physician groups may offer suggestions on how to improve the device, resulting in the manufacturer developing a more marketable product for other customers. In this way, the alliance has allowed for the com- bination of financial resources with expertise.

Alliances also seek to increase revenues for members. The strategic alliances created by supplier organizations often express the goal of increasing revenues by selling larger numbers of medical equipment, marketing new drugs and technologies to a wider number of customers, and expand- ing the scope of an organization from a local or regional provider to a national market. Any university, hospital, or private practice that generates a strategic alliance with a manufacturer or supplier for a medical innovation will plan to increase its inflow of revenue through the proceeds of developing and selling the new item.

When two healthcare organizations contribute similar resources, such as medical expertise or complementary product lines, the form is a pooling alliance. When the organizations contribute different types of resources (e.g., marketing versus product development), the form is a trading alliance (Doz & Hamel, 1998).

Research and Development As noted earlier, suppliers often join in alliances for the purpose of research and development. Examples of such projects include the development of new medicines, new medical equipment, and new medical techniques. Providers enter alliances with suppliers or manufacturers when the phy- sician or hospital creates an innovation, thereby assisting in the development of a new medical technology.

The importance of research and develop- ment alliances continues to rise due to the increasing complexity of the medi- cal environment. Competitors from other countries often receive their government’s support and funding, which enhances their ability to develop and finalize innovations. Strategic alliances combine the financial resources of member organizations with the insights and knowledge of members of individual organizations in order to develop and refine medical advancements.

Risk Sharing As organizations pool their resources and expertise, it becomes possible for them to spread their risks across a wider network, as occurs when buyers form groups to purchase insurance in vari- ous forms. For example, a network of 100,000 purchasers of health insurance policies spreads the risk of a major and catastrophic illness across a greater number of policyholders, thereby reducing

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▲▲ Strategic alliances facilitate research and development in healthcare.

Types and Purposes of Strategic Alliances Chapter 8

the risk that one claim will cause the insurance company financial jeopardy. An insurance con- tract or company with only 10,000 policyholders, on the other hand, encounters greater risk.

Likewise, suppliers joining strategic networks that work toward the development and marketing of medical improvements and innovations share the risks when there are concerns that a product or service might fail to pass a safety test or reach the marketplace. Each organization invests only part of the cost of development, thereby sharing the risk should the product fail.

When groups of hospitals form an alliance, the organizations engage in what may be termed a stabilization strategy, which means the group as a whole becomes better able to cope with a risk-laden environment, even as those organizations are dependent on the resources that the environment provides (Longest, 1990). The situation becomes stabilized through the sharing of risk among the alliance members.

Closely related to the concept of risk sharing is uncertainty reduction, which involves creating strategic alliances in order to reduce dependence on other organizations or on one particular aspect of an organization’s environment. For example, a pharmacy with only one medical sup- plier faces the uncertainty of what would happen should that supplier fail to provide a category of medicines or cease operations. By establishing alliances with several medical suppliers, the pharmacy can reduce that uncertainty.

The concept of dependence is related to both power relationships and the management of uncer- tainty. An organization that is highly dependent on another organization experiences a low level of power and higher uncertainty, which increases the potential level of risk. By reducing depen- dency, however, its power increases, uncertainty subsides, and organizational risk is reduced or shared between the alliance members (Pfeffer & Salancik, 1978).

Information Sharing and Collective Action The American Hospital Association (AHA) offers a unique form of strategic alliance that does not pursue commercial goals. Instead, the organization’s members receive other benefits. First, the organization provides interpretations of any new laws, regulations, or court decisions that will affect its members, including methods to ensure legal compliance. The AHA’s website pro- vides a forum for analysis and discussion of these new legal decisions. Second, the AHA lobbies on behalf of hospitals, seeking to ensure the best possible environment for those organizations. The AHA holds a strong voice with many in the legislative community. Third, the AHA estab- lishes benchmarks and other collective guidelines designed to help member hospitals ensure that the quality of care being delivered reaches acceptable standards (American Hospital Association, n.d.). This type of organization complements and supplements other forms of strategic alliance activities.

W E B F I E L D T R I P

The National Association of Public Hospitals and Health Systems is a strategic alliance for public health organizations. Visit the website at http://www.naph.org. Click on the “Our Work” tab to find out more about the benefits of being a member of this alliance.

• According to the website, what does NAPH offer in the areas of financial resources and support? Research and development? Risk sharing? Information sharing and collective action?

Building and Sustaining an Alliance Chapter 8

8.2 Building and Sustaining an Alliance As with any managerial process, the formation and development of strategic alliances tends to follow a basic pattern. Chapter 4 described the strategic management process in terms of the following:

• Analysis and diagnosis • Generating strategic alternatives • Strategy evaluation and choice • Strategy implementation

These four steps help explain the progression by which a strategic alliance may form. In the anal- ysis and diagnosis stage, a healthcare organization’s management team identifies an opportunity or threat that involves the potential to consider a strategic alliance. Various potential partners are considered as strategic alternatives. Then, the evaluations of those partners lead to a selection, overtures to the potential strategic partner or partners, and an agreement to join forces. Over time, all partners examine the alliance to make sure it continues to provide a viable arrangement for all concerned.

The basis of all strategic activities begins with an organization’s statement of mission and vision. Organizational alliances should only be established when the mission and vision statements of the member organizations are compatible. Without such an alignment, the alliance may be des- tined to fail before any agreement can even be finalized. Once it is established that the mission and vision of the member organizations are compatible, the stages involved in developing stra- tegic alliances include those displayed in Figure 8.2. This process may take months or even years

Figure 8.2 Steps in developing strategic alliances

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Step 1 Identifying partners

Step 2 Specifying the nature of ownership and control

Step 3 Establishing governance protocols

Step 4 Building and sustaining the alliance

Building and Sustaining an Alliance Chapter 8

to complete. As Figure 8.3 shows, some organizational theorists liken the process of develop- ing a strategic alliance to the stages of a life cycle—introduction, growth, maturity, decline, and death—each of which faces a series of challenges. (Baack, Harris, & Baack, 2013).

In the literature regarding the nature of groups and group membership, the stages of a group’s existence are forming, storming, norming, performing, and eventually adjourning (Tuckman & Jensen, 1977), as noted in Figure 8.4. Alliance building follows a similar path. Forming involves finding partners; storming includes wrestling for and establishing degrees of control; norming involves the formalization of member responsibilities; and performing takes place when the group functions at its highest levels, with members subsuming some personal interest in favor of the group’s well-being. Alliances are sustained at the performing stage, in which members func- tion together most effectively.

Identifying Partners

In the analysis and diagnosis stage of strategic management process, a SWOT (strengths, weak- nesses, opportunities, threats) analysis provides a useful tool for assessing the organization’s cur- rent situation. The same analysis becomes useful in the introduction or emergence stage of the strategic alliance process. At this stage, a matching process begins whereby potential partners are identified. Table 8.1 identifies some of the potential outcomes of this evaluation.

Figure 8.3 A life cycle of an organizational alliance

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Time

R e

v e

n u

e s

Introduction

Growth

Maturity

Decline

Death

Building and Sustaining an Alliance Chapter 8

Table 8.1 SWOT analysis outcomes for strategic alliances

Outcome Description

Mutual opportunity Two organizations discover an opportunity that benefits both.

Mutual threat Two organizations identify a threat to both.

Threat and opportunity By helping an organization overcome a threat, the partner creates an opportunity.

Mutual Opportunity As noted earlier in this chapter, mutual opportunities emerge when two or more potential part- ner organizations can combine financial resources; share expertise, knowledge, or skills to com- bat a specific medical research and development issue; join together to reduce risk and combat uncertainty; or join together for information sharing and collective action, such as lobbying. These opportunities emerge in the areas of new medical technologies, new medicines, or the abil- ity to spread costs and risks across a wider base.

Mutual Threat Sometimes, forces in the external environment create common threats for healthcare organiza- tions. Adapting to new regulations, overcoming a financial downturn, encountering a major new health problem, or encountering unexpected competitive forces can create threats to existing

Figure 8.4 Stages of group development

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Levels of member

involvement

Forming

Storming

Norming

Performing

Adjourning

Finding patterns

Establishing degrees of

control

Formalizing member

responsibilities Alliance activities

Dissolving the

alliance

Building and Sustaining an Alliance Chapter 8

organizations. The 2008 recession created circumstances in which many healthcare organiza- tions experienced declining revenues, as patients cut back on healthcare due to job losses and other financial problems. If two healthcare providers experienced the necessity of cutting back costs through decreased payrolls and other mechanisms, it would not have been surprising to find that they established a strategic alliance to protect against such threatening circumstances. Mutual threats constitute a primary reason for healthcare organizations to form alliances. The alliance can create market power and economies of scale that help partners defend against mutual threats.

Threat and Opportunity What can become a threat to one organization may turn into an opportunity for another. As an example, consider a small-town optician and eyeglass provider that suddenly faces competition from the new big-box retailer, which has just opened and which includes an optical department. The small optical store may form a strategic alliance with an eyeglass manufacturer in order to keep prices low and combat the competition from the big-box retailer. In return, the eyeglass manufacturer has a more solid purchasing base and may also be able to expand its scope.

Partner Search Each of the three circumstances created by opportunities and threats in the environment can lead to the search for partners. Those engaged in the search should recognize the potential levels of interaction between partners. Different types of strategic partner relationships include the following:

• Buyer/seller contract • Electronic data interchange relationship • Joint venture • Nonequity partnership • Strategic partnership including equity

A buyer/seller contract establishes a link between two organizations in which return purchases are expected. Some of the pur- chase terms may be spelled out in advance. Often, these less-formal alliances are cre- ated between medical suppliers and medi- cal providers. Likewise, a manufacturer of an expensive piece of medical equipment can contract to provide servicing, financ- ing, and upgrades to a strategic alliance partner as part of this type of arrangement.

An electronic data interchange (EDI) relationship expands the level of trust between two organizations. The strategic alliance partners agree to share data in order to manage orders, facilitate purchases, specify shipping information, and influence production patterns (Anderson, 1996). An example of an EDI relationship is when a pharmaceutical company contracts with a major retailer, such as Walmart, or a chain of pharmacies to ensure that drugs are shipped at the appropriate time, thereby avoiding stock-outs. In return, the retailer may provide demand data, suggesting that the pharmaceutical company increase its level of production of a certain medicine.

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▲▲ Strategic alliances range from informal buyer-seller relation- ships to complex contractual partnerships.

Building and Sustaining an Alliance Chapter 8

A joint venture involves two or more strategic alliance partners in the process of developing a new entity with shared ownership that delivers a product or service to a specific market. For example, suppose two hospitals join to create a rehabilitation center for persons with addiction issues. The joint organization may be separate from the ownership and governance of the hospi- tals while still serving as a referral outlet for both.

In the case of a nonequity partnership, two partners form a contractual relationship to share unique resources and capabilities to create a competitive advantage. The Premier strategic alli- ance noted at the start of this chapter is an example of a major nonequity partnership.

A strategic partnership including equity creates a circumstance in which member partners share partial or full ownership of the other’s organization. A hospital that purchases partial or full ownership of a clinic or individual practice engages in a strategic partnership. This type of strategic alliance might also occur when a physician or group develops a medical innovation in conjunction with a manufacturing organization, receiving partial ownership as part of the arrangement to bring the item to the market.

When the organizations seeking strategic alliances can agree to the level of engagement, it becomes possible to move on to a more focused search. This process includes clearly stating membership criteria for organizations that will join the alliance, as well as documenting the expectations of all partners.

Ownership and Control

In this second stage, the process moves beyond evaluation of potential partners toward defin- ing and finalizing the strategic alliance form. The level of collaboration through ownership and control will be affected by member expectations and the willingness to share or pool risk. Often, a management group will be consulted at this point (D’Aunno & Zuckerman, 1987). The alliance members rely on the management group to create a contractual arrangement that fairly repre- sents the interests of all members.

This phase, which is referred to as the growth or transition stage, involves negotiation processes. Individual organizational leaders must define the degree of control they are willing to relinquish on behalf of the strategic alliance. A key element in these negotiations is the degree of trust that exists, or that can be enhanced, between the members (Puranam & Vanneste, 2009).

Establishing Governance Protocols

Three issues arise as part of the process of establishing governance protocols: establishing a gov- ernance board to represent the interests of all members, agreeing to the degree of control each member will be able to exert, and making decisions about the delegation of authority. This stage continues the growth or transition stage of the cycle.

When an alliance forms, the main governing body will likely consist of members from all partici- pating organizations. Normally, each member’s chief executive officer (CEO), or some other high- ranking official, serves in that role. These members will be supplemented by others. Numerous governing boards in hospital alliances add local community leaders and donors, along with mem- bers of other interest groups.

Control within an alliance will often be dictated by degrees of ownership. The members with the highest percentage of ownership naturally expect to be able to exert greater levels of control. At

Building and Sustaining an Alliance Chapter 8

the same time, however, alliances work most effectively when a balance emerges between levels of control and levels of ownership, with the result being a continuing collaboration among partners. A partner seeking to dominate, or actually dominating, an alliance may limit collaboration and cause partners to seek other options.

Delegation issues are expressed as levels of centralization or decentralization in decision-making processes. Most of the time, the size of the alliance dictates the degree of delegation (Baack & Cullen, 1994). A major alliance, such as Premier, would be expected to have members that are largely in control of their own individual operations, and decisions would be made at the member level. A smaller alliance between a physician group and a hospital, however, may be characterized as highly centralized, with managers of the two groups in charge of decision making.

Building and Sustaining the Alliance

As an organization enters the maturity or peak stage of its life cycle, the highest levels of coopera- tion tend to exist. Members agree to common objectives and work together to fend off threats. A willingness to achieve the alliance’s interest rises to the forefront. Three major characteristics of sustained alliances are effective conflict-resolution techniques, growing trust among members, and positive perceptions regarding the costs and benefits of maintaining the relationship.

When conflicts arise between members, clearly established protocols for addressing and resolving them are already in place, as members recognize that unresolved conflict can undermine the alli- ance. As a result, they are willing to use established methods to resolve disagreements. The trust factor takes time to build and remains fragile during this stage. As organizations build longer- term bonds, however, the ability to trust rises. Members tend to continue to remain in alliances when the perception is that the benefits of remaining steadfast within the alliance outweigh the costs. Trust relationships add positive value to the members’ experience.

Alliance Dissolution

At times, an alliance may serve various purposes for the partners involved, but those circum- stances may change. Unresolved or unresolvable conflicts may occur as managers in individual entities pursue goals not congruent with the purposes of the alliance. Technological changes might introduce new medical products that induce partners to consider leaving one alliance to form another. Changes in demand can cause previously successful alliances to weaken. In some situations, such problems may lead to the dissolution of the alliance. This period mirrors the adjourning stage in a group development process and the decline/death stage of a life cycle.

In general, managers in healthcare organizations engaged in strategic alliances should recognize which stage of the strategic alliance process is occurring and should then respond accordingly. In early stages, negotiations and vying for control may be noticeable. Later, demonstrating trust and the willingness to cooperate become of utmost importance.

Building and Sustaining an Alliance Chapter 8

C A S E

The Surgical Group

Casey Wilson is the chief executive officer for the Northern Illinois Health Alliance, a collection of eight hospitals. The hospitals are located in a 200-mile area that reaches Chicago and Rockford, Illinois. Each hospital provides emergency room care, a walk-in clinic, a surgical center, and basic hospital care for other ailments. Some hospitals are differentiated by specific forms of specialized care, including a heart center, a cancer center, a women’s health facility, a sports fitness facility, and a psychiatric unit, which are located in individual hospitals.

The Northern Illinois Health Alliance established a strategic alliance relationship with members of The Surgical Group, a collection of surgeons with varying specialties. As part of the strategic alli- ance, the health alliance granted privileges to each surgeon in all of the eight hospitals. The strate- gic alliance created efficiencies in terms of scheduling, pooling of surgical staff resources, filing of insurance claims, and collections from government agencies and individual patients. The ongoing alliance had been together for more than a decade.

Recently, however, problems had begun to emerge between physicians in The Surgical Group and some of the hospitals. Some surgeons complained that the quality of the follow-up care in the postoperative area and in the hospital rooms had declined. Others raised objections to the methods used to assign anesthesiologists and other supporting members of the surgical team to individual surgeries.

A new set of issues emerged in terms of the division of fees and payments for services provided. Casey made the argument that the hospitals deserved a greater percentage of billings, due to increased costs of managing the facilities: Wages had risen, medical supplies were more expensive, and several hospitals had added high-priced technologies designed to assist the surgeons in the ser- vices they provided. The negotiations over resources had reached the point at which the chief oper- ating officer in The Surgical Group raised the possibility of discontinuing the relationship between the two organizations. If that happened, individual surgeons would have to make decisions regard- ing their willingness to practice in each hospital.

Casey was at a crossroads. She knew that the hospital group needed to raise revenues in order to remain profitable. At the same time, however, dissolution of the alliance with The Surgical Group would cause a major disruption to the surgical programs at all eight hospitals.

In answering the following questions, it may be helpful to review Sections 8.1, 8.2, and 8.3.

1. What benefits accrued to the Northern Illinois Health Alliance from this strategic partnership? 2. What benefits accrued to The Surgical Group from this strategic alliance? 3. What purposes did the strategic alliance serve between the two organizations? 4. What potential problems with strategic alliances that are mentioned in this chapter apply to this

situation? 5. Can this impasse be overcome? How should each side proceed? Defend your answer.

Alliance Benefits and Challenges Chapter 8

8.3 Alliance Benefits and Challenges Managers of strategic alliances should be cognizant of the potential benefits and problems asso- ciated with these relationships. Doing so allows them to take advantage of the strategic and struc- tural advantages alliances can create. Knowing about potential problems in advance offers the opportunity to create effective response mechanisms.

Benefits of Alliances

Some of the reasons for creating alliances already described in this chapter include the benefits of increasing sales, developing new products or services, improving the competitive positions of all members, becoming more efficient in operations, cutting costs, attaining access to new tech-

nologies, establishing effective lobbying and information-sharing programs, and improving employee skill levels.

Chapter 7 introduced the concepts of complexity and interdepen- dence and suggested that organizational structure can be designed to help leaders manage these issues. The same benefit emerges in some strategic alliances. Complexity can be dealt with by stream- lining operations for member organizations. As the Premier alli- ance example at the beginning of this chapter noted, the alliance’s database assists member organizations with understanding factors leading to effective treatment programs, while also cutting costs. The net result is the ability to manage some aspects associated with complexity.

At the same time, an alliance can create and help manage interde- pendence. When organizations join in an alliance, growing trust among members and creating strong programs for managing con- flict allow the member managers to rely on other organizations, while also maintaining a degree of autonomy. In that circumstance, interdependence becomes an advantage rather than a challenge.

The concepts of differentiation and integration also apply to strate- gic alliances. Memberships and partnerships allow disparate orga-

nizations to create a network of healthcare activities to a target community or area, thereby achieving differentiation. The alliance provides a mechanism for integration under which alli- ance members can manage individual organizations and the group collective at the same time.

Problems with Alliances

The explosion of strategic alliances in healthcare during the past few decades may be explained by a variety of forces, including political, economic, and social challenges. Managers examine the benefits of the alliances and conclude that they outweigh the costs or problems. However, the potential problems associated with strategic alliances should not be ignored. Among the most significant of these potential problems are the following:

• Time and cost • Government actions • Potential for conflict

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▲▲ Strategic alliances can create ben- efits for member organizations and their patients.

Alliance Benefits and Challenges Chapter 8

• Stagnancy and organizational inertia • Balance of interests

The first major problem or challenge associated with alliances involves the expenditure of time and cost. Developing quality alliances can be a time-consuming process, with considerable resources needed to finalize any arrangements. Costs accrue from retaining a management team to help move toward an alliance, legal fees associated with finalizing the arrangement, and pay- roll costs for those who work on the project.

Another problem associated with strategic alliances can occur when the new entity reduces or eliminates competition in a locale or region. At that point, the government may investigate the possibility that the alliance violates antitrust regulations. Even when the alliance meets legal requirements, however, some argue that reduced competition can lead to inefficiencies as mem- ber organizations lose their competitive edge (Begun, 1992). At the least, managers of members in strategic alliances should be aware of this potential stumbling block.

A third area of concern arises in the area of potential for conflict. Conflicts emerge for a variety of reasons. Whenever individuals are expected to work together while representing disparate inter- ests and organizations, the possibility of conflict occurs. Furthermore, some strategic alliances create circumstances in which the market areas of member organizations overlap, creating the likelihood of increased competitive intensity (Burns, 1999).

Fourth, stagnancy and organizational inertia pose potential problems. An overreliance on the strategic partnership can cause individual members to lose initiative. In the most severe instances, employees of the member organizations directly resist or impose policies, methods, and procedures, thus impeding or preventing meaningful change from taking place (Baack & Cullen, 1992). Over time, stagnancy and organizational inertia cause a member organization to forfeit any competitive edge it holds, and the ability to respond in a flexible, adaptable, and effec- tive manner declines.

Finally, ongoing strategic alliances continually encounter countervailing forces. On the one hand, members seek to achieve common goals, while holding complementary values and a sense of vision for the alliance. On the other, individ- ual managers of the member groups struggle to maintain autonomy, even as the alliance pursues various collective actions. At times, this tension is resolved by the dissolution of the alliance (Ury, Brett, & Goldberg, 1988). In other circumstances, the member organiza- tions may find ways to increase bonds through a more unified ownership structure (Zajac & Olsen, 1993; Zuckerman & Kaluzny, 1991).

Managerial Responses To overcome the potential problems with strategic alliances, managers can respond in several ways. The first step is awareness. Top- level management teams can work together to understand how these problem areas might arise.

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▲▲ Ongoing strategic alliances encounter countervailing forces related to maintaining autonomy while pursuing col- lective actions.

Alliance Benefits and Challenges Chapter 8

The next step, proactive management, means making adjustments before the problem takes place. Time and costs issues can be reduced through quality planning processes and advance investi- gation of obstacles to strategic alliances. Any possible government response through antitrust action should be anticipated so that the alliance can respond in an effective manner that prevents any further investigation or activity. Alliances can and do form effective conflict-resolution struc- tures in advance of problems, which limits the damage those problems will cause. Proactive man- agement anticipates stagnancy issues as the management team establishes methods to anticipate and implement needed changes. As time passes, managers know in advance whether the time has come to leave an alliance or move forward toward an even stronger pact.

Finally, reactive management is required when crises arise. Managers that have been trained to respond calmly and logically have the best chance of success when an issue, such as a lawsuit, change in government policy, or public relations attack by an interest group, occurs. Strategic alliances work best when member managers coordinate activities on a routine basis through pro- tocols such as regular meetings, information sharing, and other linkages.

C A S E

A Change of Course

When Mary Krause entered her doctoral program, she thought she was in training to become a college professor. Little did she know that circumstances, and her own skill level, would dramati- cally alter her plans. Mary had chosen a major in biochemistry. She easily passed her course work and began working as a lab manager in the university, under the supervision of the professor who would eventually supervise her doctoral dissertation.

At that point, fate intervened. Mary had access to the finest equipment in the upper Midwest. She began investigating the use of various metal derivatives that contained specific properties that might be of use in the medical community. Through months of experiments and tests, she discov- ered one specific metal with a unique feature: It would attach to cancer cells.

A series of additional tests confirmed what she hoped. A new method of delivering medicine to cancer patients who required chemotherapy became possible. Instead of overwhelming the indi- vidual with a highly toxic dose of chemicals, it might be possible to combine the medicine with the metal, thereby targeting only cancer cells and not the entire human body. This would dramatically increase the potency of the medicine, while drastically reducing the side effects of the therapy.

The discovery took Mary through her doctoral dissertation with ease. As a new Ph.D., she could have begun a search for a teaching position at practically any university of her choosing. Instead, her dissertation chair and the chair’s spouse formed a new company. The first step was to achieve a patent on the medical discovery. Then it would be possible to market the innovation to other bio- medical companies or pharmaceutical organizations that would be interested in this new treatment system. The future was bright and potentially highly lucrative, and it led Mary to become a research scientist instead of a college professor.

1. In terms of a SWOT analysis, where would Mary’s discovery fit? 2. What benefits might Mary’s company enjoy from a strategic alliance? 3. What type of strategic alliance should Mary’s company enter? 4. What issues of ownership and control, governance, and sustaining the alliance will Mary’s com-

pany encounter should it enter into such an agreement?

Key Terms Chapter 8

Chapter Summary A strategic alliance is a formal arrangement or agreement among two or more healthcare orga- nizations. Three types of healthcare organizations join alliances: suppliers, healthcare organiza- tions and providers, and consumers (patients and other buyers, such as employers). The suppliers of medical products often form two types of coalitions—one with other suppliers, and the other with other medical organizations—notably, providers. Linkages between various types of provid- ers represent a normal part of the functioning of hospitals, pharmacies, clinics, and individual physician practices. In some circumstances, sets of patients or buyers enter into strategic alli- ances. More formal agreements between managed-care units and hospitals are also generated, creating a patient (buyer)–to–provider (hospital) form of alliance. Individual consumers or buy- ers are able to form certain types of alliances with healthcare providers and each other through strategic alliance contracts. Four areas in which a strategic alliance helps a healthcare provider stay timely and competitive are financial resources and support, research and development, risk sharing, and information sharing or collective action.

The stages involved in developing strategic alliances include identifying partners, specifying the nature of ownership and control, establishing governance protocols, and building and sustaining the alliance. Partners emerge when managers perceive mutual opportunities, mutual threats, or a circumstance in which one organization realizes an opportunity by helping another deal with a threat. The potential levels of interaction between partners include buyer/seller contracts, EDI relationships, joint ventures, nonequity partnerships, and strategic partnerships including equity. Three issues arise while establishing governance protocols: establishing a governance board that represents the interests of all members, agreeing to the degree of control each member will be able to exert, and making decisions about the delegation of authority. Three major characteristics of sustained alliances are effective conflict-resolution techniques, growing trust among mem- bers, and positive perceptions about the costs and benefits of maintaining the relationship.

Strategic alliances can achieve the benefits of increasing sales, developing new products or ser- vices, improving member competitive positions, becoming more efficient in operations, cutting costs, attaining access to new technologies, establishing effective lobbying and information-shar- ing programs, improving employee skill levels, and managing complexity and interdependence. Challenges to strategic alliances include time and cost, government actions or responses, the potential for conflict, potential stagnancy and organizational inertia, and the need to balance interests. Managers can deal with these issues through understanding of potential problems, proactive managerial activities, and reactive management when crises arise.

Key Terms buyer/seller contract a contract that establishes a linkage between two organizations in which return purchases are expected

electronic data interchange (EDI) relationship a strategic alliance in which partners agree to share data in order to manage orders, facilitate purchases, specify shipping information, and influence production patterns

joint venture an arrangement in which two or more strategic alliance partners join while developing a new entity that has shared ownership and that delivers a product or service to a specific market

Critical Thinking Chapter 8

magnet hospital a situation in which a hospital has excellent patient outcomes, high levels of satisfaction among nurses, and low turnover in the nursing staff

nonequity partnership an arrangement in which two partners form a contractual relationship to share unique resources and capabilities in order to create a competitive advantage

stabilization strategy a strategic alliance strategy in which the group becomes better able to cope with an uncertain environment, even as its member organizations depend on the resources that the environment provides

strategic alliance a formal arrangement or agreement among two or more healthcare providers

strategic partnership including equity an arrangement that creates a circumstance in which member partners share partial or full ownership of the other’s organization

Additional Resources Alliance for Advancing Nonprofit Healthcare http://www.nonprofithealthcare.org

Association of Strategic Alliance Professionals http://www.strategic-alliances.org

Federal Trade Commission http://www.ftc.gov

Healthcare Leadership Alliance Competency Directory http://www.healthcareleadership alliance.org

Premier Healthcare Alliance http://www.premierinc.com

U.S. Department of Justice http://www.usdoj.gov

Critical Thinking Review Questions

1. Define strategic alliance. 2. What types of strategic alliances form among the entities involved in the healthcare

system? 3. What goals are associated with the creation of strategic alliances in healthcare? 4. How can healthcare alliances achieve the goal of enhancing financial resources and

support? 5. What is a stabilization strategy? 6. What four stages take place when building strategic alliances? 7. What types of strategic partner relationships can members of alliances develop? 8. What three issues should be decided when establishing governance protocols? 9. What three characteristics are present in sustained strategic alliances?

10. What potential benefits emerge from strategic alliances? 11. What potential problems are associated with strategic alliances? 12. How can members of strategic alliances overcome the potential problems associated with

those arrangements?

Critical Thinking Chapter 8

Analytical Exercises

1. If two medical suppliers join to produce and sell a medicine, explain how each would benefit in terms of the four purposes of alliances mentioned in this chapter.

2. What type of alliance would take place in each of the following situations? What would be the primary purpose in each situation? • Physician with a medical invention and a medical equipment manufacturer • Walk-in clinic and a pharmacy • Employees of a retail store with a pharmacy and the company that owns the pharmacy • A university and Blue Cross/Blue Shield

3. Genetic mapping has been the source of many potential new therapies and methods for preventing diseases. In terms of a SWOT analysis for a strategic alliance, what situation emerges for each of the following situations? • A biotechnical company possessing genetic mapping ability and a company with strong

marketing skills, especially to hospitals and other healthcare providers • A pharmaceutical company that does not have the mapping ability but does have strong

financial standing and a biotechnical company looking for a financial partner that does have the mapping ability

4. In terms of the four purposes of strategic alliances (i.e., financial resources and support, research and development, risk sharing, and information sharing and collective action), explain how each of the following forms would be able to, or not be able to, achieve those purposes. • Buyer/seller contract • EDI relationship • Joint venture • Nonequity partnership • Strategic partnership including equity

5. Governance protocols in strategic alliances establish a governing body, control mechanisms, and delegation processes. How do they apply to issues of complexity and interdependence?

6. Relate the concepts of differentiation and integration to EDI relationships, joint ventures, and strategic partnerships including equity.

7. In terms of the four purposes of strategic alliances (i.e., financial resources and support, research and development, risk sharing, and information sharing and collective action), explain how each of the following objectives would be related to, or not related to, the prob- lems associated with strategic alliances mentioned in this chapter. • Time and cost • Government actions • Potential for conflict • Stagnancy and organizational inertia • Balancing of interests

Critical Thinking Chapter 8

8. Explain how each of the following forms would be related to, or not related to, the problems associated with strategic alliances mentioned in this chapter (i.e., time and cost, govern- ment actions, potential for conflict, stagnancy and organizational inertia, and balancing of interests). • Buyer/seller contract • EDI relationship • Joint venture • Nonequity partnership • Strategic partnership including equity