Health Deliver- Lead

CHAPTER 9 Leadership and The Complex Health Organization: Strategically Managing the Organizational Environment Before it Manages You

We need leadership on the fundamentals of eating right, exercising, and not smoking. I am interested in getting people to use the healthcare system at the right time, getting them to see the doctor early enough, before a small health problem turns serious.

Donna Shalala, President of the University of Miami 1

This chapter discusses the leader’s role in strategically leading the organization. Basic principles of creating and implementing a mission, vision, value, strategies, goals, objective statements, and action steps are presented. A matrix tool that assists in understanding relationships within the environment that affect organizational culture and change management is also described. In addition, the leader’s self-awareness and understanding of cultural factors are emphasized in terms of their effects on organizational change. The chapter concludes with an emphasis on strategic leadership options for managing organizational culture change.

LEARNING OBJECTIVES

· 1. Identify the strategic direction elements of the strategic plan, identify the other elements of the strategic and operational plan, describe each of these elements in summary, and outline which internal and external environmental factors influence the strategic plan to include strategic sourcing.

· 2. Distinguish the levels of organizational culture and summarize the actions and behaviors a health leader would perform to proactively and positively change organizational culture.

· 3. Predict how strategic planning might positively influence organizational culture and the internal environment; describe how strategy selection (e.g., competitive, adaptive) reinforces those changes to organizational culture and the internal environment and its impact on strategic sourcing.

· 4. Analyze how external and internal environmental factors influence the strategic plan and the organizational culture of a health organization.

· 5. Design a methodology to perform internal environmental scanning, monitoring, and assessment and external environmental scanning, forecasting, and monitoring for a hospital or group practice, public health organization, long-term care organization, stand-alone allied health practice, or retail pharmacy.

· 6. Interpret the current external environmental factors in the health industry; turn the interpretation into a critical list for action for a health organization; and appraise each element on the critical list for action as to where it should be addressed by the health organization (e.g., strategic plan, directional strategies, external or internal environment, organizational culture), noting that critical list items may affect more than one area of the health organization.

MISSION, VISION, VALUES, STRATEGIES, GOALS, OBJECTIVES, AND ACTION STEPS

Leaders in health organizations utilize a strategic system of leadership and management. Much of the literature uses the phrase “strategic management system” to describe this system. In reality, a more appropriate name for it is “strategic system of leadership and management,” because people are led and resources are managed: Human resources are “managed” from a context of a strategic human resources system considering job analysis, job design, and the like, but the people need to be led. From this context, the dynamic culture leadership (DCL) model, for example, ascribes to a strategic system of leadership and management with a heavy emphasis on organizational culture. Embedding a strategic and operational planning structure and process, with feedback loops, into the organizational culture is paramount for organizations if they hope to survive in dynamic conditions. Regardless of organizational type or industry or size, strategic systems are required. Indeed, as complexity increases, these systems become even more critical as long as the leadership holds to a consistent application of the system and organizational values.

Health organizations are complex and are of varying sizes. Sizes range from small solo physician practices to a town pharmacy to an integrated group practice to a rehabilitation company to a stand-alone hospital to a large integrated health system. Regardless of the size of the health organization, the speed of change, the complexity of the health industry, and the expectations of perfection by society, all health organizations require leaders’ wise use of mission, vision, values, strategies, goals, objectives, and action steps to steer their course. Health leaders use these elements to guide the organization; develop and maintain an effective, efficient, and efficacious organizational culture; and focus the collective energy of the health organization where people are led and resources are managed. The health leadership team most likely will utilize a strategic and operational planning process to formally develop an organization’s mission, vision, strategies, goals, objectives, and action steps. As part of this effort, each element of strategic and operational planning will be discussed in rational groupings.

Mission, vision, and values are guideposts 2 that leaders use to focus the health organization’s collective energy and resources. “Mission, vision, values, and strategic goals are appropriately called directional strategies because they guide strategists when they make key organizational decisions.” 3 A health organization’s mission is tied to its purpose. Purpose is what the organization does every day to meet the needs and demands of the external environment (patients, customers, and stakeholders) and to deliver its outputs to a community in some competitive way (effective, efficient, efficacious, and available). Stakeholders include those individuals, groups, community members (individual and collective), and companies that interact with the organization, such as patients, customers, staff members, suppliers, and the community. Stakeholders can directly and indirectly influence the success of the organization.

An extension of purpose is the health organization’s mission. Mission is why the organization exists, which business it is in, who it serves, and where it provides its products or services. Swayne, Duncan, and Ginter defined characteristics of mission statements as follows:

· 1. Mission statements are broadly defined statements of purpose;

· 2. Mission statements are enduring;

· 3. Mission statements should underscore the uniqueness of the organization; and

· 4. Mission statements should identify the scope of operations in terms of service and market. 4

Vision is an aspiration of what the organization intends to become—that is, the shared image of the future organization that places the organization in a better position to do its mission and fulfill its purpose. In essence, vision is the dream of what the organization can become. Values are the beliefs and attitudes that an organization holds that guide day-to-day decision making, behavior, and actions. Health leaders “acquire vision from an appreciation of the history of the organization, a perception of the opportunities present in the environment, and an understanding of the strategic capacity of the organization to take advantage of these opportunities. These factors work together to form an organization’s hope for the future.” 5

· The purpose of a vision statement is to provide a group, organization, or community with a shared image of its direction over the long term. It catalyzes a group’s efforts and focuses decisions. Vision statements should:

· 1. Describe an organization’s big picture and project its future;

· 2. Be grounded in sound knowledge of the business;

· 3. Be concrete and as specific as practical;

· 4. Contrast the present and the future;

· 5. Stretch the imaginations and creative energies of people in the organization;

· 6. Have a sense of significance; and they should matter. 6 , 7

Leaders must be ever cognizant of the need to be consistent in the development of a mission statement and a vision statement and the need to embrace the values that the health organization holds as important. Yukl suggests using the mission and vision development process as a means for leaders to transform organizations by developing a strategic vision in consultation with the senior leadership team, articulating a clear and appealing vision, developing (senior leadership ownership required) a strategy or strategies to attain the vision, and focusing on the core mission(s) of the organization. 8 Schein argues that mission, vision, and strategies are essential for external adaptation—that is, for conforming with the expectations of the external environment—for organizations. 9 Senior leadership must be committed to and involved in the process of mission and vision statement development, but also involve their subordinates and staff in the process as well. 10

Morris and Senge call strategists (in this case, health organization strategists) “pathfinders” in that they provide a vision, determine the approaches the organization will take to realize the vision, and provide a clear methodology to implement the plan and succeed. 11 ,12 Where there is no vision, the people perish. 13 Health leaders are clearly in the “pathfinder” role for their organizations. “Strategic processes encompass a wide range of topics including analysis, planning, decision making and many aspects of an organization’s culture, vision and value system.” 14

Strategies, goals, and objectives are the sequential building blocks of planning to successfully achieve the mission, but also for striving to achieve the vision of the health organization. “Strategic goals are those over-arching end results that the organization pursues to accomplish its mission and achieve its vision.” 15 Strategies follow “a decision logic of development.” 16 Directional strategies lead to adaptive strategies, market entry strategies, and competitive strategies; each of these strategies should also have its own implementation strategy. 17 Figure 9-1 summarizes the types, scope, and role of strategy.

Goals translate the broad strategies of the vision into specific statements for organizational action by focusing the organizational resources so as to achieve the strategy and build the vision. Goals are broader statements—sometimes aspirations—that are hierarchically above objectives. Objectives align organizational resources to meet the stated goals. Objectives should be measurable, assigned to a responsible person (agent or owner), have time lines for completion, and be frequently reviewed by the health organization leadership for progress and resource sufficiency. Action steps (or action plans) are created to produce a step-by-step or task-level implementation sequence for each objective. Each task in the action steps (or plan) has a responsible person (or owner) and a time range for accomplishment, and some tasks may have a measurable variable as well. Action step owners “report” to the objective owner, who “reports” to the goal owner, who ultimately reports to the leadership team; the senior leadership team directs the organization at the strategy level.

FIGURE 9-1 Strategy taxonomy, scope, and roles.

Source: Swayne, L. E., Duncan, W. J., & Ginter, P. M. (2006). Strategic management of health care organizations (5th ed.). Malden, MA: Blackwell, p. 229 , Exhibit 6-3.

Mission, vision, values, strategies, goals, objectives, and action steps are essential components of the strategic system of leadership and management. Health leaders utilize the strategic system’s tools, such as planning (strategic and operational), to transform, guide, and develop organizational culture, thereby focusing the collective energy and resources of the health organization to effectively, efficiently, and efficaciously serve its purpose. “Strategy-making processes are organizational-level phenomena involving key decisions made on behalf of the entire organization.” 18 Vital to strategic thinking, planning, and implementation, understanding the internal environment of the health organization is of paramount concern for the health leader; in fact, Roney suggests that internal assessment is a basic component of any comprehensive plan. 19

UNDERSTANDING THE INTERNAL ENVIRONMENT

Internal scanning, monitoring, and assessment of the health organization are vital leadership activities. It is well known that effective leaders are effective internal organization scanners, monitors, and assessors. Research on internal organizational scanning, monitoring, and assessment consistently points to active and ongoing leadership emphasis in this arena. In 1986, Komaki reported that leaders and managers who did more monitoring were more effective; in 1990, Yukl found that school principals who monitored internal activity well had higher scholastic achievement in their schools; and in 1987, Jenster noted that successful firms that monitored the progress of their strategic plans performed much better than their competitors. 20

The most important elements of understanding the internal health organization’s environment should focus on systems such as the human resources management system, supply chain system, technological system, information system, and culture and subcultures. The salient theme is one of integrated synergy among all the health organization’s systems. Specific areas of scanning, monitoring, and assessing for the health leader include the following issues:

· • Competitive advantage and the unique or distinctive competencies the organization possesses (e.g., centers of excellence)

· • Strengths and weaknesses of the organization

· • Functional strategies for implementation of strategies that are supported by goals, objectives, and action steps

· • Operational effectiveness, efficiency, and efficacy

· • Organizational Culture (Is the culture aligned with the organization’s direction?)

Health leaders must create a well-thought-out approach to internal scanning, monitoring, and assessing of the organization against the current strategic and operational plans (which focus effort toward the organization’s vision and mission) and the fit with the external environment. How the health leader conducts these processes depends on the viewpoint (or paradigm or context). Leaders develop assumptions and constraints that are internally oriented to achieve understanding of the internal environment. Assumptions in this context are internal (rooted in organizational circumstances) and characterized by a situation or state that exists now or will exist in the future and guides thinking. Constraints include any current conditions that may prevent strategies or goals from being pursued in striving to meet the organizational vision. Constraints are rooted in existing rules, traditions, habits, policies, social norms, or laws that set parameters on what an organization or individual can do.

The remainder of this section discusses topics involved in understanding the internal organizational environment; organizational culture is discussed later in this chapter.

Institutional Factors

Institutional organizations and environments highlight the importance of social, political, and psychological aspects of organizational dynamics. There is really no mystery why so many health organizations are so similar when looking at basic processes and policies. According to Powell and DiMaggio, the creation of a field of organizations triggers a paradox—namely, that rational actors make the organizations similar as they simultaneously try to change the organizations. 21 ,22

An understanding of what constitutes a field is useful in understanding the constructs of institutional theory. Organizations are considered to be in a field if they are institutionally defined and dependent on structural equivalence—that is, if there is a need for an organization to meet certain established competencies that prevent competing organizations from becoming too dissimilar. This situation is an example of the “walks like a duck, looks like a duck, and quacks like a duck” phenomenon: Then it must be a duck. It is important for health leaders to appreciate the fact that a successful CEO in one health organization will likely be successful in another health organization due to the basic organizational similarities found across the field. Much of this success derives from leaders’ mastery of “run” stage competencies and thorough understanding of the context of health. The process of defining institutional organizations and environments can be judged based on four dynamics:23– 25

· • An increase in the interaction among organizations in a particular group

· • Emergence of interorganizational structures, domination, and patterns of coalition

· • An increase in the information load that an organization must address

· • A mutual “awareness” among participants in a set or organizations that they are involved in a common enterprise

Institutional Factors vs. Institutionalization

Leaders must make a distinction and be aware of the benefits of an institutional view versus becoming institutionalized within thought and actions. As noted, an institutional view is helpful in establishing norms in the field, communicating standards of practice, and creating benchmarks that others can view as examples of excellence. An institutional view also can assist leaders in maintaining effectiveness within the profession. However, leaders who take on an institutional view without recognizing important changes in culture, climate, and environment can become extremely ineffective as well. Leaders who become resistant to change find their opinions so rooted in arrogance that they often become positions of pride rather than evidence. Such is the case with distance learning education and some outside stakeholder organizations. Although the U.S. Department of Education has found “. . . on average, students in online learning conditions performed modestly better than those receiving face-to-face instruction,” 26 leaders in some accrediting, professional, traditional, and fixed facility organizations still have a baseless bias against distance learning education. This institutionalized and unsupported opinion will ultimately lead to a loss of market share, talent recruiting, and productivity for those institutionalized organizations (or leaders) over time.

The Institutional View

The institutional view, in essence, is an assessment of the organization’s situation as compared against a health leader’s predetermined standard, benchmark, or expectations relative to competitors. 27 In this context, organizational strengths and weaknesses are determined, unique organizational competencies are compiled, and functional-level implementation strategies are assessed.

Part of this effort involves listing the organization’s strengths and weaknesses. Strengths are what the organization does well, which elements create a competitive advantage, and what makes the organization uniquely appealing to the external environment. Conversely, weaknesses are those elements that the organization does not do well or lacks, and that makes the organization appear less desirable in the external environment. Health leaders must make difficult decisions to lessen or remove weaknesses in their organization, whereas strengths are highlighted and used as building blocks for future expansion.

Unique health organization competencies are focused to create competitive advantage. Competencies merge with resources and processes (or systems—that is, a group of processes) to create capabilities; the assessment of capabilities determines the level of competitive advantage a specific capability confers upon the health organization. Once strengths and weaknesses are determined, how the health organization compares to its competitors and to relevant standards (such as the professional or national standard of care) enables an honest assessment of the organization’s competitive advantage. What the organization does—its purpose—is assessed. The assessment should be performed on the patient or customer flow process of preservice (what exists and is accomplished before caring for a patient), point of service (the patient care process and experience), and after service (patient interaction and organizational activity after the care process); it should also be performed on the organizational culture, structure, and strategic resources (e.g., technology, supply chain, human resources, information systems). The results may then be compared to competitors’ performance, with competitive advantage being defined in terms of those organizational characteristics that are evaluated as valuable, rare, imitable, and sustainable. 28 From this assessment, advantages and disadvantages can be discerned. Of equal importance, implementation strategies must be scanned, monitored, and assessed.

Understanding the implementation of strategies in a health organization can be complex. Nevertheless, with a thorough plan and teamwork, implementation strategies can be assessed effectively. Implementation of any strategy is key to success; a strategy in and of itself does nothing if it is not put into practice. Given that many health organizations have similar competencies and enjoy only subtle competitive advantages relative to their competitors, implementation is a very essential organizational “skill” that health leaders must build into their organizations. In fact, effective implementation may be the best competitive advantage a health organization possesses. Implementation strategies are also called functional strategies and operational strategies: Do not let the terminology confuse you—implementation is concerned with putting a strategy into practice, utilizing the strategy, and gaining from the strategy.

In implementation, vertical and horizontal fit are important aspects of assessment. Vertical fit comprises the congruence, interoperability, and seamlessness between different organizational levels in putting a strategy into practice. In vertical fit assessment and strategic implementation, the following leadership concerns are vital:

· • Organizational coupling (adherence to rules, policies, procedures, and norms)

· • Interdependence between organizational units (interdependence creates uncertainty)

· • Similarity in work functions between units (similarity in work units creates ambiguity)

· • Quality control and in-progress reviews

· • Communication

An assessment of these concerns to reduce weak points and flaws, the appropriate allocation of resources, leadership communication of expectations, goal setting, frequent communication between team members, and appropriate leadership intervention, guidance, and rewards during the process are essential.

Horizontal fit is the coordination and integration of different actions, tasks, functions, or processes performed at the same organizational level. Health leaders should consider this assessment from a coordination (sequencing, serial, or parallel processing) perspective; however, similar concerns exist as in assessment of vertical fit.

Institutional organizations focus on the reproduction of organizational activities and routines in response to external pressures, expectations of professionals in the industry, and collective norms of the institutional environment. In this manner, organizations hold themselves hostage to coercive (outside stakeholders telling them what to do), normative (making efforts to benchmark against like organizations in the same field), and mimetic mechanisms (copying the best practices and procedures of similar organizations despite the fact that the organization may or may not have a structure that supports the practice). These behaviors continue to make the organization more similar to other like organizations without necessarily making it more efficient. Health leaders in highly institutional organizations would be wise to become rapidly familiar with the environmental pressures of coercion, mimicry, and other normative external pressures.

Institutional Environments

Overall, institutional environments are preoccupied with ensuring that the correct and appropriate structures and processes are used to pursue organizational goals and objectives. Institutional constraints consist of elaborate rules and regulations to which organizations must conform if they are to receive support and gain legitimacy. Institutional organizations tend to be tightly coupled across all policies, procedures, and cultural norms. In this environment, the leader may be bound to policies so massive that even the simplest new actions and changes require more effort than they are worth. 29 The only way to uncouple this kind of binding to an institutional environment is to reengineer the organization. Entire departments, many personnel, and a wealth of practices may need to be eliminated and new ones established in their place to alter this tightly coupled situation.

Most often, health organizations are a hybrid of institutional and technical environments. Technical environments exist where there is a need for interdisciplinary teamwork and varied skill sets that enable organizations to manage, control, and coordinate work processes effectively, while buffering them from environmental institutional disturbances. Technical environments are characterized by barriers to entry into the industry due to the vastness of knowledge, skills, and abilities of professionals in that environment as well as the high cost of the technology required to produce the products and services of the industry. The medical care sector, for example, seems to combine relatively strong institutional and technical environmental forces. 30

Resource Dependency

The resource-dependent organization desires to maintain autonomy and remain relatively independent of its environment. At the same time, organizations also recognize the need to form coalitions to bring together resources to help reduce transaction costs. If the environment is unstable, organizations may be less likely to rely on other organizations for support. The stability of the environment may be evaluated by assessing the number and types of organizations, the munificence of those organizations (maturity and size), and the interconnectedness of those organizations (competition and complexity of relationships).

Resource-dependent organizations also assume that leaders can actively increase an organization’s effectiveness and influence the environment. Effectiveness is defined as the ability to create acceptable outcomes and actions as perceived by outside organizations and agents. 31 In the health arena, the supply chain component of the organization, and of the industry for that matter, may fit best within this typological category.

One of the basic propositions governing the resource-dependent organization is that leaders must be aware that the most efficient or effective organizations do not always survive. Rather—and perhaps not surprisingly—the organizations with the most power survive. Power is defined as the ability to secure and maintain the most stable and most respected networks of resource chains. Key steps in maintaining power include preparing contingency plans for potential environmental shifts, building redundant networks, and establishing an efficient value chain. As in the supply chain example, volume of purchases and extensiveness of supplier networks act as the power behind efficient and effective supply chain operations in health.

For example, in a stable and healthy environment, resource chains may be several levels deep and have many redundant alternatives. In this milieu, an organization’s power may be affected by the introduction of more influential organizations into the environment or by the scarcity of resources and resource levels in periods of environmental famine. Organizations are vulnerable if vital resources are controlled by other organizations, such as manufacturers and distributors of medical equipment, supplies, and pharmaceuticals. Thus organizations purposefully engage in networks of interorganizational relationships to obtain the needed resources and improve their survival chances. In the end, the organization with the best access to suppliers, customers, regulators, and competitors holds the most power in the market and has the greatest survival potential. 32

The resource-dependent view is also an inventory of the health organization within the context of how it serves its purpose in the external environment. In this paradigm, the health organization’s resources, capabilities, competencies, core competencies, and distinctive competencies are assessed. 33 “Resources are the stocks of human and nonhuman factors that are available for use in producing goods and services. Resources may be tangible, as in the case of land, labor, and capital, or they may be intangible, as in the case of intellectual property [includes business and care processes], reputation, and goodwill.” 34 Similar to the institutional view, the organization’s list of resources and competencies is assessed to determine their value, rareness, imitability, durability, and ultimate importance to the organization.

Definition of these terms in this context is appropriate. Value is the subjective worth of the organization’s resources in the practice of “purpose” as it delivers its services and products to the external environment; surrogate measures of value can be market share, lives saved, procedures successfully performed, number and percentage of patients successfully treated, percentage of return patients or customers, and financial statements (considered subjective in this context because a financial statement is temporal). Rareness reflects how likely one would be able to find the services, products, and processes in the external environment; rareness would denote that one would not find a similar set of services or products or processes. (Of course, a health organization can be rare but of little or marginal value.) Imitability describes the speed with which the health organization’s resources, processes, and capabilities can be duplicated or copied by other health organizations. Durability indicates the speed with which a health organization’s resources, processes, and capabilities become obsolete or not usable; this issue is especially important considering the expected standard of care in the health industry.

Health leaders should continuously build and improve the resource and competencies list in this view as assessed by the directional strategies and strategic goals of the organization. A strengths and weaknesses assessment, as discussed previously within the institutional view, is a valuable tool in this context as well. A five-step approach to strategy analysis in this paradigm follows:

· 1. Identify and classify resources.

· 2. Combine strengths and turn them into capabilities.

· 3. Appraise the profit (margin, for nonprofit organizations) potential of capabilities.

· 4. Select the strategy that best serves the organization given the macro and micro external environmental factors.

· 5. Identify resource gaps and invest in weaknesses. 35

Resource-Dependent Environments

In a resource-dependent environment, the organization requires resources to gain and maintain power and, therefore, must (sometimes reluctantly) interact with the environment. 36 At the same time, a resource-dependent organization conceptualizes the environment in terms of other organizations with which the focal organization engages in exchange relationships. The closed-panel health maintenance organization (HMO) is an example of this type of environment. In this situation, leaders want total control of empanelled providers, enrolled beneficiaries, referrals, and practice plans; they want to dictate the types of services provided and have governance over all other practices and procedures. Today, closed-panel HMOs—at least under the original model developed by Kaiser Permanente—cannot expect to survive for long periods of time in the free market. Leaders who try to maintain a hermetically sealed organization and operation fail to achieve economies of scale and scope and often lose competitive advantage. 37

Contingency

Contingent organizations are more flexible and rely less on rigid policies and practices. These organizations utilize more loosely established internal best practices; hence they are described as loosely coupled. Within this type of organization, a leader’s success is based on a unique amalgamation of internal and external factors—that is, organizational and environmental factors are contingent on one another. Leaders of contingent organizations base many of their assumptions on the fact that many aspects of organizational survival are dependent on factors beyond the organization’s control. For the organization to achieve a “good fit” and survive, internal and external demands on the organization must be balanced effectively given the environment. The leadership approach is always based on the organization’s current situation in this model. Leaders of this type of organization know that what makes an organization successful today may not keep it successful tomorrow. 38

The underlying assumptions of contingent organizations are based on the premise that organizational structures are open and are not organizationally egalitarian: There is no one best way to organize, and any one way of organizing is not equally effective in another organization. In keeping with this last postulate, what might work in one organization with one set of particular environmental conditions and employees may not work in a similar organization with its own set of conditions and employees, regardless of the similarity of the organizations. 39

The contingent view utilizes a scenario-based methodology. Health leaders use an institutional, resource-dependent, or combined approach to scan, monitor, and assess the internal organizational environment, create various likely scenarios for the organization (possible futures in which the organization would survive and thrive), and assess the internal organization’s strengths, weaknesses, competencies, patient or customer processes (preservice, point of service, and after service), and implementation strategies against those scenarios. Each scenario requires the internal organization to be evaluated in terms of its value, rarity, imitability, sustainability, durability, vertical and horizontal fit of strategy implementation, and impact on and congruence with organizational culture. Assessment as compared to competitors, potential competitors, and macro and micro environmental changes should be conducted routinely. A method for evaluating internal health organizations is provided in Table 9-1 ; multiple contingent scenarios can be evaluated by scoring each scenario against the others.

Leaders operating an organization that practices a contingent strategy need to be aware that the organization’s growth may not always support the contingent strategy. Size refers to the scale and scope of an organization, especially the number of individuals to be organized. Contingent organizations suggest that size is positively correlated with increasing levels of bureaucratic scale within organizations. Child provided empirical evidence that size and bureaucratic structure are related to organizational performance: As organizational size increases, a higher degree of routinization is required (i.e., more policies, procedures, and tighter coupling). 40 Furthermore, larger organizations will tend to be more highly diverse in terms of organizational structure, be more vertical (more levels of hierarchy), and have greater horizontal differentiation (more divisions and a greater span of control). As a result, growth of contingent organizations suggests a need for a wide variety of specialized tasks; these include larger administrative components, in terms of both the number of hierarchical levels and the number of internal support personnel required. 41

Table 9-1 Internal Health Organization Assessment

Current Institutional Resource	Value (1–10, where 10 is best)	Rarity (1–10, where 10 is best)	Imitability (1–10, where 10 is best)	Sustainability (1–10, where 10 is best)	Durability (1–10, where 10 is best)	Fit (Vertical and/or Horizontal) (1–10, where 10 is best)	Organizational culture (1–10, where 10 is best)
Strengths (list and score each)
Weaknesses (list and score each as a 1–10 negative number to show how weak each item is)
Competencies (list and score each)
Capabilities (list and score each)
Implementation strategies (list and score each)
Patient or customer flow process (list [preservice, point of service, and after service] and score each)
Organizational culture

Contingent Environments

An important factor for a leader operating an organization in a contingent environment is that as the environment becomes more uncertain, organizations respond by employing strategies that change structural characteristics of the organization. 42 Furthermore, organizations tend to cope with uncertainty from the environment by buffering their technical core and protecting the main revenue generation processes of the organization from outside influences. For example, pharmaceutical companies threatened by the expatriation of patents and the possible introduction of generic drugs that threaten their profits and market share may develop a similar product line in which the same pill needs to be taken only once a week instead of daily. By doing so, the organization protects its technical core under a fallacy of daily dosage quality. Leaders in this type of organization use symbolic and political messages more often in times of uncertainty and ambiguity than structural or human resources–oriented pronouncements.

Matrix Assessment

An assessment tool can be a good starting point to assess the internal environment. Taking internal environmental scanning, assessing, and monitoring into account, the successful health leader will create a system, method, or set of tools with which to understand the internal situation. Table 9-1 shows an example of this kind of tool.

As in the contingent health organization, scenarios are developed as possible future states for the organization. Using the tool in Table 9-1 , each scenario would be scored and ranked. Each scenario should be ranked as to the likelihood of its being fulfilled or realized; then the table rankings and scenarios should be compared.

The next phase envisions how to transform the health organization to serve its purpose, fulfill its mission, and achieve its vision in the external environment. What would be required to change weaknesses into strengths (or at least render the factor neutral) for the health organization? What should be changed to improve or change competencies that can be translated into needed or demanded capabilities? Which revisions or resources would be necessary to improve implementation strategies, and which changes would be needed to develop a more appropriate organizational culture? Table 9-2 can serve as a catalyst to this thought process.

A thorough and continuous internal health organization scanning, monitoring, and assessment system will serve leaders, managers, and the organization as a whole very well. Understanding “who” and “what” the health organization is as part of its current status or “state of nature” is a critical element to leading people and managing resources. Internal assessment is a tangible method for understanding the integration of all of the various resources and capabilities of a complex health organization. How the health organization fits with and serves its purpose in the community is of utmost importance to the leader and leadership team. Understanding the external environment—the topic of the next section—is the next major challenge.

UNDERSTANDING THE EXTERNAL ENVIRONMENT

Table 9-2 Improvement of Internal Health Organization

Internal Component (State for each Component)	Goal (State in simple terms)	Expectation (State in simple terms what is expected from this effort)	Tangible Resources Required (List land, labor, and capital)	Intangible Resources Required (List processes, intellectual property, reputation, and goodwill)	Expected Cost of Resources (List each resource needed and its approximate cost, and sum the costs)	Time Range to Complete (Provide a starting date and an ending date)	Importance Rank (Rank each item by importance to the organization considering the scenario scores)
Weaknesses
Competencies and capabilities
Implementation strategies
Organizational culture

Understanding the external environment focuses on scanning, monitoring, forecasting, and assessing the macro and micro forces of the external environment. Scanning involves identifying the subtle to dramatic signals of macro and micro forces as they change. Monitoring focuses on deriving meaning from a pattern of observations from scanning macro and micro forces. Forecasting is the active development of projections and likely scenarios based on the patterns identified through monitoring. Assessing entails prioritizing and quantifying the effects of changes in the macro and micro forces external environment, with scenario forecasts being incorporated into that valuation. “External environmental analysis attempts to identify, aggregate, and interpret environmental issues as well as provide information for the analysis of the internal [organizational] environment.” 43

The critical reason for understanding the external environment is to determine how to best situate the health organization to serve its purpose in the short term, yet still be able to adapt and survive in the long term. Rakich, Longest, and Darr provide categories that give leaders a structure through which to scan (environmental scanning), monitor, forecast, and assess a dynamic health industry:

· 1. Macro-Environmental Forces

· a. Legal, [regulatory, executive orders, and case law] and ethical forces

· b. Political (including government policy) forces

· c. Cultural and sociological (including values [beliefs and attitudes]) forces

· d. Public expectations (including community, interest groups, and media)

· e. Economic forces

· f. Ecological forces

· 2. Health Care Environmental Forces [also called Micro-Environmental Forces]

· a. Planning and public policy (regulation, licensure, and accreditation) forces

· b. Competitive forces

· c. Health care financing (third-party payers, both public and private, and financial risk)

· d. Technology (equipment, material, and supply entities) forces

· e. Health research and education

· f. Health status and health promotion (wellness and disease)

· g. [Integration with other health disciplines and organizations] public health (e.g., sanitation, environmental protection) forces 44

The Rand Corporation suggests that the immense pressure of cost containment is the leading factor for change in the health industry at this time. 45 Multiple forces, however, cumulatively contribute to change in the health industry. Professional associations and societies, the scholarly literature, and professional journals are all sources in which to look for external environmental information.

An evaluation of threats and opportunities of the external environment is essential for the health organization. Threats and opportunities (externally focused) are married to strengths and weaknesses (internally focused) to complete the SWOT analysis used in many strategic planning models and processes. Threats comprise issues, events, or changes that affect the organization negatively and serve as barriers to mission accomplishment and vision attainment. Opportunities are potentially positive issues, events, or changes that, with planning, resourcing, and implementation, can have positive effects on the health organization.

Another aspect of external analysis, particularly regarding forecasting, is the development of assumptions and constraints. Assumptions are perspectives on a condition or state of nature that are supposed to be true or are taken for granted. Assumptions in this context are external (rooted in macro- or micro-environmental factors) and suggest a situation or state that exists now or will exist in the future that guides thinking. Constraints are current conditions that may prevent strategies or goals from being pursued in striving to meet the organizational vision. Constraints are rooted in existing rules, traditions, habits, policies, social norms, or laws that set limits on what an organization or individual can do or plans to do.

Using federally mandated programs on emergency preparedness as examples, the Public Health Emergency Preparedness (PHEP) cooperative agreement, managed by the Centers for Disease Control and Prevention, and the Hospital Preparedness Program (HPP), managed by the Assistant Secretary for Preparedness and Response, are required to be aligned. (Both are subordinate to the U.S. Department of Health and Human Services.) An illustration of planning at a programmatic level is provided in Figure 9-2 . The assessment of the jurisdiction (county, district, city, etc.) provides the environmental assessment and situational analysis with which the improvement planning is facilitated. The GREaT Assessment System (General information, Resource Elements, and Tasks) provides the basis for the required assessment of 15 capabilities and 65 functions for the PHEP and 8 capabilities and 29 functions for the HPP.

Example of Situational Assessment

Figure 9-2 shows an example of the strategic process and requirements of the public health emergency preparedness program utilized by all states and territories as directed by the Centers for Disease Control and Prevention, The Office of Public Health Preparedness. The assessment is an example of a situational assessment that links to a strategic and operational planning process aimed at preparedness improvement. The PHEP guidelines provide the basis for assessment of capabilities and functions for public health. The HPP guidelines provide the basis for assessment of capabilities and functions for healthcare delivery organizations/hospitals. Both of these programs are funded and managed separately but now require alignment and integration to provide a better picture of preparedness.

FIGURE 9-2 Public health preparedness assessment.

Creating a planning culture allows leaders and their organizations to utilize the planning concepts and tools across multiple contexts and programs. An overview of horizontal, vertical, and dynamic external environmental considerations is provided for discussion in the next section. Leaders need to understand how various linkages and relationships influence their organization, especially as it relates to situational assessment and environmental influences.

Horizontal Factors

One of the most difficult leadership skills for health executives to master is to view the health organization as a horizontal organization. Horizontal organizations have cooperative relationships, affiliations, or ownership rights with multiple outside agents and actors. A health actor is any individual, group, or organization that exerts influence on an entity. An agent is a principal lobbyist or representative of a health actor that is trusted with making decisions or statements on behalf of the actor. When poor relationships are in place, actors and agents working in concert can exert so much pressure on the organization that the organization is placed in a position where it must accede to the will of outside parties rather than acting in its own interest. Given this possibility, it is the goal of every healthcare executive to ensure that harmonious and affable relationships are maintained within the horizontal structure. 46

From a reductionist point of view, horizontal organizations seek to maintain a level of homeostasis with all elements internal and external to the establishment. In horizontal organizations, it is not possible to operate and survive without forming cooperative relationships with multiple outside actors and agents. As a result, horizontal organizations must maintain a careful balance between mutually exclusive organizational needs and the needs of external stakeholders. Failing to balance these simultaneous priorities may lead to organizational failure or loss of competitiveness (i.e., loss of market share or market penetration).

For example, a health organization that views health only from a business-driven perspective (defined as concentrating on rates of return and profit or margin as the primary goal) may find over time that it has lost competitive advantage relative to other organizations in the same industry and could lose the trust and confidence of customers. Such was the perception of the health industry by the U.S. population in the 1980s and early 1990s. The introduction of managed care principles, such as gatekeeper access, specialty care referral, and preauthorization, caused consumers to perceive that health organizations were large, uncaring companies that were more concerned with keeping people away than providing high-quality care for the ill and injured.

A more recent organizational example can be found among the traditional big-oil companies in 2005, 2006, and 2007. Increases of more than 100% in fuel prices in less than one year (and even higher increases in some areas) created distrust for these organizations among consumers. Compounding this perception were reports of record-breaking, billion-dollar profits for the fuel companies as well as exorbitant personal salaries and bonuses for their executives. At the same time, customers were forced to pay record-breaking prices for a gallon of gasoline at the pump. These outcomes caused consumers to perceive oil companies as focused on greed and self-fulfillment, and resulted in the Democratic-led Congress of 2007 revoking certain tax incentives for these organizations.

Despite these negative examples, health organization cannot afford to become too altruistic and empathetic. For example, engaging in an abundance of uncompensated and charity care may fail to promote organizational survival, prosperity, and growth. Clearly, balance is necessary in a health organization participating in a horizontal environment.

Vertical Factors

The horizontal organization stands in stark contrast to the vertical organization. The vertical organization builds a monument unto itself and seeks to minimize its reliance on any and all outside stakeholders and actors. In terms of organizational dynamics, there are actually very few truly vertical organizations. Thus, when we speak of vertical organizations, we refer to those organizations that attempt to control the environment first, rather than living in the environment and becoming a participatory member within the community.

Vertical considerations include health providers, possible competitors, suppliers, patients, customers, and other stakeholders associated with health services and goods that are above or below the organization within the continuum of care. For example, a hospital would have vertical considerations at the primary care level (e.g., physician offices and group practices) and above its level in tertiary care (e.g., a large medical center) or rehabilitative care or hospice care. Developing solid relationships and coordination are the keys to success in this scenario, which explains why many of these organizations work to become vertically integrated.

Vertical integration in the health industry is the ability, through ownership, affiliation, or alliance, to offer products and services that span the continuum of care. A vertically integrated health system may offer primary care, secondary care, tertiary care, long-term care, and hospice care services under its umbrella; likewise, it may include academic medical centers (e.g., in-house education and practice for physicians and surgeons, nurse education and training, allied health education and training), a group purchasing organization and distribution operation (for controlling the supply chain, as described in “The Non-intermediated or Vertically Integrated Health Supply Chain,” where the health organization internally performs many of the distributor functions of the supply chain 47 ), and a research and development operation. This broad span of operations differs significantly from that of a horizontally integrated health organization. Large horizontally integrated health organizations encompass several like organizations across a large area; for example, a health system may include 25 hospitals located across 5 states. Some large health systems are both vertically and horizontally integrated. The degree of integration in each dimension plays a role in determining whether the organization assumes a horizontal or vertical internal “stance” and influences the organizational culture.

One of the last, great vertical organizations was the Ford Motor Company of the early twentieth century. Henry Ford not only built cars, but also owned dealerships, transportation companies, steel mills, oil refineries, rubber plantations, tire manufacturing warehouses, fuel companies, and leather and tanning industries. Put simply, he attempted to control all aspects of automobile manufacturing. This philosophy eventually failed for Ford; however, many organizations still try to minimize their reliance on outside environmental actors and agents.

Some early health organizations, such as the initial Kaiser closed-panel HMO model of the early 1940s, also attempted to replicate the vertical organization structure. In today’s dynamic health environment, few organizations can be mutually exclusive while simultaneously relying on no outside influences.

Dynamic Factors

Dynamic organizations are those that do not qualify as either vertical or horizontal organizations. They also do not fit nicely into a model of being an open or closed organization. Nevertheless, many dynamic organizations may be described as having an open and horizontal architecture as opposed to a closed and vertical persona. Open and closed systems can exist in either horizontal or vertical organizations, depending on the organization’s size and complexity.

In an open system, organizations are a smaller part of a larger system. Consequently, the environment has a central role in determining organizational survival. Additionally, in an open system model, the system interacts with and adapts to the environment; thus the situation may be described as dynamic. Inherent to open systems are feedback loops and adaptation to the external environment. Open systems do not negate prediction entirely; rather, through control over and understanding of the influences, outcomes are presumed. In such a case, the leader realizes that the environment is defined as the sum of the political, economic, social, and regulatory forces that exert influence on the organization; the organization itself is viewed as an organic living system within the environment. In this regard, no organization is entirely self-contained. As a result, the organization is dependent to some extent on the environment.

Standing in opposition to the open system is the closed system approach to organizational life-cycle analysis. In this design, the leader must be aware that the organization is guided by internal governance. In other words, the sum total of work of the organization is split within internal staff. Additionally, the leadership is hierarchical, probably more technically competent than conceptually driven, and the work of the organization is carried out impersonally and autocratically. In the closed system, the leader and the organization operate in isolation from environmental influences as much as possible. The effects are entirely predictable, because a finite number of variables affect the outcome. Such systems are not the rule, however, but rather the exception. 48 – 51

When unpredictable open and horizontal systems actively interact with one another, it takes an accomplished leader to steady the organization in view of the higher levels of complexity. A complex system exists in the dynamic environment when large numbers of interacting organizations and elements begin to establish patterns and relationships that are new and unique. This dynamic can result in rapid and unpredictable change, following no apparent pattern. Complexity, therefore, is an extension of the general system for which the leader must be prepared. 52

For leaders in the modern era, effectiveness in dealing with the complex dynamics of the health industry requires a deep understanding of the relationships between evaluative and empirical properties. Management within this kind of dynamic environment is most difficult for early careerists to do before they have mastered the complexities of the “crawl” and “walk” elements of professional growth. For example, relationships may exist between segments within the organization along an informal network that have great consequences for organizational outputs. The more dynamic the task environment, the greater the contingencies presented to the organization.

It can be an intimidating task to forecast the future in a dynamic environment. Different possibilities in the environmental characteristics constantly require the creation of new and different ways of positioning the organization for success. Leaders must produce and determine contingencies that can quickly be put in place for countless future scenarios that may evolve. As Daft has suggested, in such an environment, both the destination and the route may turn out to be unexpected and unintended; strategy emerges spontaneously from the chaos of challenge and contradiction, through a process of real-time learning and politics. 53

Leaders in the current era are more likely to work in open health systems. Thus the importance of an external presence for the leader cannot be overemphasized. The leader becomes the calming voice on behalf of the organization in an otherwise turbid and uncertain environment to countless stakeholders, many of whom the leader has no direct influence upon, other than through the power of his or her organization.

ORGANIZATIONAL CULTURE

From a broad perspective, health leaders assess the external and internal environments of the organization, determine which organizational culture will best meet the needs of the external environment, and then design, develop, implement, and refine the organizational culture. From this “big picture” view, leadership seems simple—yet accomplishing the task of organizational alignment with the external environment requires a focused, clear, appealing vision that is well communicated, combined with leadership and management team actions that are consistent with that vision. From this standpoint, leaders must be knowledgeable and competent about organizational dynamics, culture, communication, assessment and analysis, and change management. All of these areas are important, yet culture is the fabric that weaves all of these components together.

Health leaders can forge a new, better-fitting organization by devising a new culture that meets the needs of a dynamic environment using the best of science and art. If a supportive and confirming communication organizational environment, a planning and accountability emphasis, a push-down decision-making strategy that focuses on appropriate employee empowerment, and a learning and knowledge management-oriented operation are characteristics of the organizational culture needed to best provide health services and products, then the health leader needs an implementation plan or concept. To begin moving an organizational culture toward change, the health leader should take the following guidelines to heart:

· • Model the behavior you expect yourself.

· • Communicate expectations and train other leaders, managers, and staff.

· • Revise structures and reporting relationships.

· • Conduct team-based planning and policy development.

· • Use primary and secondary mechanisms 54 (discussed later in this chapter).

· • Be consistent and communicate often to the organization.

· • Continue to scan, monitor, and assess the internal health organization environment while you scan, monitor, forecast, and assess the external environment.

Defining Organizational Culture

Organizational culture is a complex construct that incorporates many concepts and multitudes of variables. It encompasses a large set of largely ignored or invisible assumptions that deal with how group members interpret both their external relationships (external environment) and their internal relationships with one another. Culture is an outcome of group learning. As people solve problems together successfully, a condition for culture formation exists. Health organizational survival is intimately linked to meeting the needs of the external environment (the community that the organization serves). This goal is accomplished by effectively, efficiently, and efficaciously (high quality) developing organizational integration of resources, capabilities, and systems (developing synergy) to produce services and goods that satisfy marketplace demands and expectations.

Each organization deals with external adaptation and internal integration in its own way. The “way” the health organization adapts and integrates forms its collective organizational culture.

Schein gives an excellent summary of the various issues related to external adaptation and internal integration:

External Adaptation Issues 55

· • Mission and strategy: Obtaining a shared understanding of core mission, primary tasks, and organizational functions (both manifest and latent).

· • Goals: Developing consensus on goals, as derived from the core mission.

· • Means: Developing consensus on the means to be used to attain the goals, such as the organizational structure, division of labor, reward system, and authority system.

· • Measurement: Developing consensus on the criteria to be used in measuring how well the group is doing in fulfilling its goals, such as the information and control systems.

· • Correction: Developing consensus on the appropriate remedial or repair strategies to be used if goals are not being met.

Internal Integration Issues 56

· • Common language and conceptual categories: If members cannot communicate with and understand one another, a group is impossible by definition. Consider healthcare jargon as an example.

· • Group boundaries and criteria for membership inclusion and exclusion.

· • Power and status: Consensus in this area is crucial as to who has power and status.

· • Intimacy, friendship, and love: What are the rules of the game for peer relationships?

· • Rewards and punishments: What are heroic and sinful behaviors?

· • Ideology and “religion”: How are unexplainable and inexplicable events given meaning?

As you read about and reflect on organizational culture in the remainder of this chapter, note which similarities the research and information here share with research and models of leadership such as the omnibus leadership model, the dynamic culture leadership model, and the reframing organizational leadership model from authors Coppola, Ledlow, and Bolman and Deal. Can you integrate the concepts?

Edgar Schein, who is recognized as the “father of organizational culture,” defines culture as a pattern of basic assumptions that are invented, discovered, or developed by a given group as it learns to cope with its problems of external adaptation and integration; these assumptions have worked well enough to be considered valid and, therefore, are taught to new members as the correct way to perceive, think, and feel in relation to their problems, challenges, and opportunities. 57 Sathe defines culture as the “set of important understandings (often unstated) that members of a community share in common.” 58 Louis suggests that organizational culture is “a set of understandings or meanings shared by a group of people; the meanings are largely tacit among the members, are clearly relevant to the particular group, and are distinctive to the group.” 59 Consider healthcare marketing and advertising in today’s very competitive environment: Thirty years ago, very little “health care” was advertised (and thus became part of the culture); today, competition is intense and marketing and advertising are essential for survival. Marketing, customer service, entertainment during the care process, and advertising are now key parts of the culture that help ensure health organizational survival.

At the heart of organizational culture are questions about values, beliefs, and attitudes that become translated into behaviors, norms, and social expectations within the health workplace. Culture consists of ideational elements such as beliefs and values that explain and reinforce the foundation of the organization. 60 Which values, beliefs, and attitudes do you hold? How do they differ from your organizational experiences?

· An attitude is a learned predisposition to respond to a person, object, or idea in a favorable, neutral, or unfavorable way. A belief is the way you structure what is true and false and a value is an enduring conception of good and bad. 61

Layered like an onion (as depicted graphically in Figure 9-3 ), values power beliefs and beliefs greatly influence attitudes. Behaviors are linked to attitudes. Behaviors are easier to change than attitudes, and attitudes easier to change than beliefs and values.

FIGURE 9-3 Values, beliefs, and attitudes.

Source: Adapted from Beebe, S. A., & Masterson, J. T. (1997). Communicating in small groups: Principles and practices (5th ed.). New York: Addison-Wesley Educational, p. 174 .

Where can you see, hear, or touch organizational culture?

· Manifestations of culture include rituals, stories, humor, jargon, physical arrangements, and formal structures and policies, as well as informal norms and practices. Content themes (such as values or basic assumptions) are used to capture and show relationships among interpretations of the meanings of these manifestations. These are the building blocks needed for you to understand the theoretical assumptions underlying a culture study, summarize the content of any cultural portrait, and if you wish, develop your own answers to the questions: What is culture? What is not culture? 62

Schein provides insight into the tangible and intangible components of organizational culture. According to this theorist, three levels of culture interact to form the fabric of culture. Notably, organizational culture cannot be assessed and “known” in a short time or by walking through the corridors and reading policy documents; rather, it is discerned by observing, interviewing, and interacting with the full spectrum of these three levels. 63

· • Level 1: Artifacts and creations: These elements are the most readily visible components of culture and include the organization’s constructed social and physical environment. This level includes technology, art, visible and audible behavior patterns (visible but often not decipherable) such as written and spoken language, overt behaviors, and the ways in which members demonstrate status.

· • Level 2: Values: Values are testable in the physical environment, but are testable only by social consensus (such as taking care of patients). Central values provide the day-to-day operating principles that the members of the culture use to guide their behavior. As values are taken for granted, they gradually become beliefs and drop out of consciousness, just as habits become unconscious and automatic.

· • Level 3: Basic underlying assumptions: Level 3 elements include the relationship to the environment; the nature of reality, time, and space; the nature of human nature; the nature of human activity; and the nature of human relationships (taken for granted, invisible, preconscious). These implicit assumptions tell group members how to perceive, think about, and feel about things. These assumptions are taken for granted; members would find behavior based on any other premise inconceivable. 64

Martin also recommends four types of formal practices, of interest to culture researchers, that should be evaluated to begin to understand organizational culture: (1) organizational structure and hierarchy (reporting relationships and locations), (2) tasks and technologies (what employees do to produce goods and services), (3) rules and procedures, and (4) financial controls (authority to commit, audit, and forecast financial resources). 65 Informal practices that should be evaluated (if possible) are not written down, but rather take the form of social rules and norms (“how things really work around here”). Often, these unwritten rules are inconsistent with formal policies and procedures. 66

Organizational climate is a temporal phenomenon that changes quickly based on the current situation and influences. Climate is a snapshot in time and is dynamic, whereas culture remains stable over a longer time span. In essence, a simple explanation comprises a long series of organizational climate snapshots, strung together over time, that depict a large part of organizational culture; this is especially true in explaining the feeling of the workplace.

Climate can be changed quickly. For example, how would your subordinates and the work climate change if you announced a 5% pay reduction to support a budget cut? The next day, you announce that the pay reduction was an error and each employee will actually receive a 5% pay increase: Would the climate change? What would happen if you greeted and talked with each employee for a few minutes each morning to check on that person and his or her family and interests, and you followed this routine consistently over several weeks, but then one day you came in with a sad or frowning face, walked into your office, and closed the door, not coming out to greet everyone? How would climate change?

Health leaders can affect climate on a daily basis. With consistent application of behaviors, training, expectations and goals setting, reinforcement, and communication, over time climate influences culture.

Organizational Culture Typologies

Several different typologies of organizational culture exist. A typology is a categorization and description system that attempts to make sense of differing “states of nature” with regard, in this case, to organizational culture. The following subsections describe some of these typologies.

Interpersonal Interaction Model 67

The interpersonal interaction model categorizes organizational cultures into one of four types:

· • Power culture: Strong leaders are needed to distribute resources. Leaders are firm, but fair and generous to loyal followers. If the organization is badly led, there is rule by fear, abuse of power for personal gain, and political intrigue.

· • Achievement culture: Results are rewarded, but not unproductive efforts. Work teams are self-directed. Rules and structure serve the system, but are not an end unto themselves. A possible downside is sustaining energy and enthusiasm over time.

· • Support culture: Employees are valued both as people and as workers. Employee harmony is important. The weakness is a possible internal commitment without an external task focus.

· • Role culture: There is a rule of law that outlines clear responsibilities; reward systems are clear, with tight coupling to responsibilities. This type provides stability, justice, and efficiency. Its weakness lies in the impersonal operating procedures and a stifling of creativity and innovation.

Gordon and DiTomaso’s Typology

Gordon and DiTomaso’s typology of organizational culture is based on the persona of the organization. Table 9-3 describes this typology.

Table 9-3 Gordon and DiTomaso’s Typology

Cultural Practices	Description/Scale
Aggressiveness/action orientation	Emphasis is placed on getting things done, on being a pacesetter rather than a follower.
Innovation	This type indicates the extent to which individual managers are encouraged to take risks and innovate.
Confrontation	This type involves addressing issues openly instead of burying them.
Planning orientation	This element emphasizes managing in a proactive (planning) manner and avoiding surprises.
Results orientation	Emphasis is placed on holding people accountable for and demanding clear end results.
People orientation	A strong emphasis is placed on concern for growth of current employees.
Team orientation	This type refers to the extent that people are encouraged to cooperate and coordinate within and across units.
Communication	This type involves an openness to communicate in other areas of the company that might affect how a job is done.

Source: Data from Gordon, G. G., & DiTomaso, N. (1992). Predicting corporate performance from organizational culture. Journal of Management Studies, 29(6), 783–797.

Daft’s Typology

Daft’s typology categorizes organizational cultures based on external and internal behaviors and actions. Table 9-4 describes this typology.

Societal Expression Cultures

There are different types of culture, just as there are different types of personality. Researcher Jeffrey Sonnenfeld identified four types of cultures:68

· • Academy culture: Employees are highly skilled and tend to stay in the organization, while working their way up the ranks. The organization provides a stable environment for employees to develop and exercise their skills. Examples include universities, hospitals, and large corporations.

· • Baseball team culture: Employees are “free agents” who have highly prized skills. They are in high demand and can rather easily get jobs elsewhere. This type of culture exists in fast-paced, high-risk organizations, such as investment banking and advertising.

· • Club culture: The most important requirement for employees in this culture is to fit into the group. Usually employees start at the bottom and stay with the organization. The organization promotes from within and highly values seniority. Examples include the military and some law firms.

· • Fortress culture: Employees do not know if they will be laid off. These organizations often undergo massive reorganization. There are many opportunities for those with timely, specialized skills. Examples include savings and loan companies and large car companies.

Defining Leadership from an Organizational Culture Context

Many studies have attempted to elucidate the relationship between the leader and the group and to determine the effect of a leader’s personality and style on group formation as highly relevant to the understanding of how cultures form and evolve. Most group and leadership theories develop distinctions parallel to the internal and external task-oriented leadership functions and the internal group-oriented leadership functions. Schein’s well-established paradigm of leadership is an excellent example of implied scientific and artistic practice. Schein views the unique and important function of leadership, as contrasted with management or administration, as the conceptualization, creation, and management of organizational culture. 69 Culture is a learned and evolved system of knowledge, behavior, attitudes, beliefs, values, and norms that is shared by a group of people.

· Leaders go beyond a narrow focus on power and control in periods of organizational change. They create commitment and energy among stakeholders to make the change work. They create a sense of direction, then nurture and support others who can make the new organization a success. 70

Health leaders lead people and manage resources within a framework of organizational culture.

Changing and Adapting Organizational Culture

Table 9-4 Daft’s Organizational Culture Typology

Cultures	Description
Adaptability/entrepreneurial	The organization is characterized by a strategic focus on the external environment through flexibility and change to meet customer needs. The organization actively creates change. Innovation and risk taking are rewarded.
Mission	The organization places major importance on a clear vision of organizational purpose. This type is appropriate for organizations concerned with serving specific customers in the external environment, but without the need for rapid change.
Clan	The organization has a primary focus on the involvement and participation of the organization’s members and on rapidly changing expectations from the external environment.
Bureaucratic	The organization has an internal focus and a consistency orientation for a stable environment. There are high levels of consistency, conformity, and collaboration among members.

Source: Data from Daft, R. L. (2000). Organization theory and design. Mason, OH: South Western College Publishing.

How do health leaders implement their proposals and recommendations? How do they communicate the assumptions underlying these proposed solutions and embed them in the health organization’s thought processes? Most often, leaders use an approach that does not consider the contemporary realities of organizational life:

· The problem is simple: we are using a mechanistic model, first applied to managing physical work, and superimposing it onto the new mental model of today’s knowledge organization. We keep breaking change into small pieces and then manage the pieces. But with change, the task is to manage [lead] the dynamic, not the pieces. 71

When leadership scholars describe the importance of the leader “articulating a vision” for the group, they are referring to this same set of issues—that is, to the development of organizational culture. 72 The next two subsections describe essential concerns for health leaders who want to succeed in developing, changing, and maintaining organizational culture. In the dynamic environment of the health industry, the leader’s ability to assess the changing situation (externally and internally) and revise the organization’s culture is a vital competence whose successful use requires a set of skills and abilities grounded in these mechanisms. The following subsections provide guidelines with which to measure your leadership effectiveness with regard to organizational culture; these areas—primary embedding mechanisms and secondary articulation and reinforcement mechanisms—are where you, the leader, change, maintain, reengineer, and alter organizational culture.

Primary Embedding Mechanisms 73

Health leaders have a set of powerful tools, behaviors, and mechanisms at their disposal with which to develop, refine, maintain, or change organizational culture. The importance of these mechanisms cannot be overstated. The primary embedding mechanisms are as follows:

· • What leaders pay attention to, measure, and control

· • Leader reactions to critical incidents and organizational crises

· • Deliberate role modeling, teaching, and coaching by leaders

· • Criteria for allocation of rewards and status

· • Criteria for recruitment, selection, promotion, retirement, and excommunication

Schein strongly states that leaders communicate both explicitly and implicitly the assumptions they really hold. If they are conflicted, their conflicts and inconsistencies are also communicated and become part of the culture. Consistency is the key; health leaders must predetermine where and how to guide the organization and stay on task. The secondary set of mechanisms (profiled next) support the primary set.

Secondary Articulation and Reinforcement Mechanisms 74

The secondary articulation and reinforcement mechanisms reinforce the primary embedding mechanisms. The following are of the greatest importance:

· • The organization’s design and structure

· • Organizational systems and procedures

· • Design of physical space, facades, and buildings

· • Stories, legends, myths, and parables about important events and people

· • Formal statements of organizational philosophy, creeds, and charters

Schein calls these mechanisms “secondary” because they work only if they are consistent with the primary mechanisms. They are less powerful, more ambiguous, and more difficult to control than the primary mechanisms—yet can be powerful reinforcements of the primary messages if the leader is able to control them. The important point is that all of these mechanisms communicate culture content to newcomers and current staff.

Health leaders do not have a choice about whether to communicate, only about how much to manage what they communicate through words, actions, or neglect: Leaders cannot not communicate. Organizations differ in the degree to which the cultural messages are consistent and clear, and this variation in cultural clarity is a reflection of the clarity and consistency of the assumptions of the leaders. 75

CHALLENGES OF CHANGE

As Morrison points out, there are significant challenges to health reform in the United States. Health leaders should be cognizant of these challenges as they work to positively change the culture of their health organizations, the culture of the health industry, and the expectations of the nation as a whole:76

· • Recognizing the political, structural, and resource distribution tension between health and health care; understanding that medical care is not the only factor behind health status

· • Developing health policies beyond managed competition

· • Finding ways to make community-based healthcare systems work

· • Clarifying the fuzzy boundaries between for-profit and nonprofit health care

· • Dealing with regional diversity in such a large and diverse country

STRATEGIC RELATIONSHIPS AS A SYSTEM FOR LEADERSHIP CONCERN

This section of the chapter was co-authored with Dr. Karl Manrodt. Dr. Manrodt (see Figure 9-4 ) serves as a professor in the Department of Marketing and Logistics at Georgia Southern University, located in States-boro, Georgia. He is also the director of the Southern Center for Logistics and Intermodal Transportation, and he has co-authored 5 books and over 100 academic articles and reports. Dr. Manrodt is the architect and primary force behind the International Supply Chain Metric Project, a multi-decade effort for the Warehouse Education and Research Cooperative (WERC).

FIGURE 9-4 Karl Manrodt, PhD.

All organizations, especially health organizations, require strategies to survive in the competitive health industry. Leaders must evaluate, build, and maintain strategic relationships with other organizations, such as suppliers, personnel companies, and federal and state agencies, as well as other organizations. In one significant area of leadership—where situational assessment, environmental analyses, organizational culture, planning and strategy, and goal achievement interact—evaluation, selection, and relationship building with strategic partners (other organizations such as suppliers of equipment, medical/surgical supplies, or pharmaceuticals) are a critical set of competencies.

Important research by the International Association for Contract and Commercial Management shows that most companies operate under conventional transaction-based models that are constrained by a formal, legally oriented, risk-averse, and liability-based culture. 77 There is growing awareness that transactional-based approaches do not always give each party the intended results. Alternative sourcing business models are a viable alternative to the conventional transactional methods. Outcome-based approaches are gathering momentum as senior leaders see positive results from carefully crafted collaborative agreements. The CAAVE Model (Competitive, Avoiding, Adaptive, Vested, and Empathetic styles of strategic partnership positioning) offers one method to evaluate and develop strategic partners; in addition, the Compatibility and Trust (CaT) Assessment evaluates relationship dynamics, market dynamics, and compatibility (organizational culture is a major aspect of compatibility) of those strategic relationships. These partnerships take multiple forms, ranging from conventional transaction-based models to equity partnerships. A continuum of these relationships can be found in Vitasek, Crawford, Nyden, and Kawamoto’s book, The Vested Outsourcing Manual. 78

In order to better understand the environment firms operate within, this section of the chapter outlines seven sourcing business models that fall into three categories ( Table 9-5 ). Each model differs from a risk/reward perspective and should be evaluated in the context of what is being procured. The characteristics and attributes for each of these approaches are reviewed in detail. This is followed by a discussion of the CAAVE Model and the CaT Assessment.

Transaction-Based Models

Many companies use transaction-based business models for their commercial agreements when they make a “buy” decision. Conventional approaches to transaction-based models keep service providers at arm’s length. Three types of transaction-based sourcing relationships have changed over time as businesses struggle with how to create service provider relationships that are better suited for more complex business requirements.

Table 9-5 Sourcing Models*

Sourcing Business Models	Sourcing Business Model Categories
	Transaction Based	Outcome Based	Investment Based
Simple transaction provider	X
Approved provider	X
Preferred provider	X
Performance-based relationship		X
Vested relationship		X	X
Shared services (internal)			X
Equitable partner (external)			X

Source: Reproduced from Vitasek, K., Keith, B., Eckler, J., and Evans, D. (n.d.). Unpacking sourcing business models: 21st century solutions for sourcing services. Retrieved from http://www.vestedway.com/wp-content/uploads/2012/09/Unpacking-Sourcing.pdf .

* This section is based on “Unpacking Sourcing Business Models: 21st Century Solutions for Sourcing Services” by Kate Vitasek, Bonnie Keith, Jim Eckler, Dawn Evans, in collaboration with Jacqui Crawford, Karl Manrodt, Katherine Kawamoto, and Srinivas Krishna.

The economics for each of these types of supplier relationships are similar in that the supplier gets paid per the transaction. There is typically a predefined rate for each transaction, or unit of service. For instance, a third-party logistics service provider would get paid each month for the number of pallets stored, the number of units picked, and the number of orders shipped. Or a call center service provider would get paid a price per call or a price per minute.

Transaction-based business models are best suited when a supplier is supplying a standardized service with stable specifications that are easily measured through a commonly agreed to set of metrics. Payment can be triggered based on successful transactions completed.

The three types of transaction-based providers can be described as simple transaction provider, approved provider, and preferred provider.

Simple Transaction Provider

A simple transaction provider is a supplier who is one of many available in the marketplace, typically providing a low-cost, repetitive service. The services provided by this type of provider are often competitively bid, frequently with no interruption of service or impact to the buyer’s business. A purchase order often triggers these transactions, which signals that the buying company agrees to buy a set quantity of goods or tasks (or hours) outlined in the purchase order. The supplier relationship is based solely on a review of the supplier’s performance against standard metrics (did the supplier work that many hours or provide the good or service in the quantities purchased?).

Approved Provider

An approved provider is one who has been identified as offering a unique differentiation from other transactional suppliers and provides an efficiency or cost advantage for the client company. The differentiation could come in the form of a geographical location advantage, a cost or quality advantage, or being a small disadvantaged business that is ultimately approved to assist with meeting the client company’s minority and women business enterprise (MWBE) goals. An approved provider is identified as a prequalified option in the pool of transactional suppliers and has fulfilled preconditions for specified service. Procurement professionals routinely turn to approved suppliers as regularly solicited sources of supply when bidding is conducted. An approved supplier may or may not operate under a master services agreement (MSA)—an overarching contract with the buying company. Approved suppliers may or may not also have volume thresholds to receive an approved status. Finally, approved suppliers may or may not participate in supplier management reviews.

Preferred Provider

A preferred provider is a supplier that has been qualified, may have a unique differentiator, and has had demonstrated acceptable performance with the buying company. Typically, these conditions include:

· • Previous experiences

· • Supplier performance rating (if the client company has a rating system)

· • Previous contracts compliance performance

· • Evidence of an external certification (e.g., International Organization for Standardization [ISO] certification)

Buying companies frequently seek to do business with a preferred provider in an effort to streamline their buying process and build relationships with key suppliers. Buying companies often enter into a longer-term contract using an MSA that allows the companies to do repeat business more efficiently. It is common for preferred providers to work under a blanket purchase order (PO) with predefined rates for work or services performed. For example, a labor-staffing firm may have a “rate card” that has the hourly rate established for various types of staffing needs. The buying company can request staffing support from the preferred provider using the predetermined blanket PO and rate card. Another example would be a facilities management firm having a pre-agreed rate of a certain price per square foot to manage a company’s buildings. Often companies will work with a preferred provider using a supplier relationship management plan in which both companies agree on improvement or other opportunities.

It is worth noting that a preferred provider is still engaged in a transactional business model, but the nature and efficiencies for how the companies work together go beyond a simple purchase order.

Table 9-6 outlines typical characteristics of each of the transaction-based business model approaches frequently used today.

Outcome-Based Business Models

An outcome-based business model pays a service provider for the realization of a defined set of business outcomes or business results, or achievement of agreed-on performance indicators. Historically, outcome-based approaches are used most widely in the aerospace and defense industries. In this setting they are referred to as performance-based logistics because they couple maintenance and support with the procurement of the product. Rolls-Royce was the first known firm to explore outcome-based approaches in the 1960s. However, outcome-based business models did not gain traction until around the year 2000, and even then the use was still limited. What is an outcome-based business model? A good example is when an airline pays its outsourced ground crew for achieving a short 20-minute turnaround time after the plane has been parked at the gate. In basic form, the service provider does not get paid if it does not deliver results. An outcome-based business model typically shifts some or all risk for achieving the desired outcome to the service provider.

Outcome-based business models have gained in popularity as more companies outside of the aerospace industry have adopted the concepts and have expanded the thinking to pure outsourced service deals. A well-structured outcome-based agreement compensates a service provider’s higher risk with a higher reward. Unfortunately, some companies wrongfully structure deals around “all risk, no reward”; in these cases, a supplier or service provider that does not meet the desired results is penalized.

There are two types of outcome-based business models: a performance-based agreement and a vested outsourcing agreement.

Performance-Based Agreements

The relationship with suppliers under a performance-based agreement is different than with transactional providers because these agreements begin to shift the thinking away from activities to outcomes. However, they usually still pay a supplier using transaction-based pricing triggers. These contracts are often called “pay for performance” because they have an incentive or a penalty tied to specific service-level agreements (SLAs) outlined in the contract.

Table 9-6 Attributes of Transaction-Based Business Models

Sourcing Relationship	Focus	Interaction	Cooperation Level	Required Trust Level	Characterized By
Simple transaction provider	Cost and efficiency	Standard terms, fixed price	Low: Automated where possible	Minimal: Single transaction	Abundant and easy to resource, no need for a relationship
Approved provider	Economies of scale, ease of transactions	Blanket, negotiated terms, pricing agreements	Medium: Based on pricing or specifications	Medium: Common terms and price agreement	Managed by category locally and across business sector, purchases bundled for economies of scale
Preferred provider	Capability, capacity, and technology transactions	Contract, SOW, pricing agreement, possible gain sharing, SLAs	High: Set out in long-term service contract	High: Defined by contract, high spend zone	Integral supply across business units, delivering added value and capability, not so abundant, a pain to resource

Key: SOW = Statement of Work, SLA = service level agreement.

Source: Reproduced from Vitasek, K., Keith, B., Eckler, J., and Evans, D. (n.d.). Unpacking sourcing business models: 21st century solutions for sourcing services. Retrieved from http://www.vestedway.com/wp-content/uploads/2012/09/Unpacking-Sourcing.pdf .

For instance, a company outsourcing its call center will likely still pay a cost per transaction (most often a cost per call or cost per minute); however, it creates incentives or penalties if the service provider does not hit a metric, such as answering 80% of the calls within 20 seconds. (It is the authors’ opinion that incentives work better than penalties and create a more positive working relationship with service providers.)

Performance-based agreements usually require a higher level of interface between the service provider and a buying company in order to review performance against objectives and determine the reward or penalty options that are typically embedded in the contract. These reviews are periodically scheduled and generally include representatives from the service provider and the client company contracting resources.

On some occasions, the buying company’s service user(s) participate in the reviews; however, in these relationships there is a tendency for the client company to solely make the reward determination. If this is not done properly and fairly, it can cause the buyer–supplier relationship to become more adversarial in nature.

The length of time covered by the agreement in a performance-based relationship is also typically longer than in transaction-based agreements. It is not uncommon to see agreements spanning 3 to 5 years, and some even longer; however, the contract language may allow for termination at the client company’s determination (termination for convenience) within 30, 60, or 90 days.

Vested Outsourcing

Vested outsourcing or the vested approach is a highly collaborative outsourcing business model in which both the client and service provider have an economic vested interest in each other’s success. An excellent example is Microsoft and Accenture’s relationship, called OneFinance. Both parties entered into a 7-year agreement in which Accenture was challenged to transform Microsoft’s back office procure-to-pay processes. The agreement is structured so that the more successful Accenture is at achieving Microsoft’s goals and transforming the work, the more successful Accenture becomes itself. (For more information and case studies on vested outsourcing, see Vitasek, Manrodt, & Kling, Vested: How P&G, McDonald’s, And Microsoft Are Redefining Winning in Business Relationships.)

The term vested outsourcing was originally coined by University of Tennessee researchers to describe highly successful outcome-based outsourcing agreements the researchers studied as part of a significant research project funded by the U.S. Air Force. Research showed that vested outsourcing agreements combined an outcome-based model with the Nobel award-winning concepts of behavioral economics † and the principles of shared value. ‡ Using these concepts, companies enter into highly collaborative arrangements designed to create value for everyone involved above and beyond conventional buy–sell economics of a transaction-based agreement.

The vested outsourcing model is best used when a company has transformational or innovation objectives that it cannot achieve itself or by using conventional transaction-based or performance-based approaches. These transformational or innovation objectives are referred to as desired outcomes; it is these desired outcomes that form the foundation of the agreement. A desired outcome can be defined as a measurable business objective that focuses on what will be accomplished as a result of the work performed. A desired outcome is not a task-oriented SLA utilized in a conventional statement of work or performance-based agreements; rather, it is a mutually agreed upon, objective, and measurable set of deliverables for which the service provider will be rewarded—even if some of the accountability is shared with the company that is outsourcing. A desired outcome is generally categorized as an improvement to cost, schedule, market share, revenue, customer service levels, customer satisfaction levels, or performance.

Another great example of a vested outsourcing agreement is one between Jaguar and Unipart. Unipart was inherently incentivized under its 10-year agreement to make significant investments that would increase dealer support and ultimately improve customer loyalty for service parts management effectiveness and efficiency. Under the agreement, Unipart helped Jaguar move from number 9 in JD Powers customer loyalty to number 1 by leveraging vested thinking. 79 Together the companies were able to reduce the number of cars waiting on warranty parts by 98%, while at the same time, reducing inventory levels by 35%. (Inventory costs money to hold, store, manage, and maintain; thus, less inventory on hand costs less.)

† Behavioral economics is the study of the quantified impact of individual behavior or of the decision makers within an organization. The study of behavioral economics is evolving more broadly into the concept of relational economics, which proposes that economic value can be expanded through positive relationships with mutual advantage (win–win) thinking rather than adversarial relationships (win–lose or lose–lose).

‡ Shared value thinking involves entities working together to bring innovations that benefit the parties—with a conscious effort that the parties gain (or share) in the rewards. Two advocates are Harvard Business School’s Michael Porter and Mark Kramer, who profiled their “big idea” in the January–February 2011 Harvard Business Review. The article states that shared value creation will drive the next wave of innovation and productivity growth in the global economy. Porter is renowned for his Five Forces model of competitive advantage. Due to his prominence, it is likely that his take on shared value, although focused on society, will cause practitioners to embrace shared value approaches.

Table 9-7 Attributes of Outcome-Based Business Models

Sourcing Relationship	Focus	Interaction	Cooperation Level	Required Trust Level	Characterized By
Outcome-based/performance-based relationship	Outcomes or performance	SRM governance, performance incentives, fees at risk	Integrated	Integrated	Longer-term relationship
Vested outsourcing relationship	Mutual gain, shared outcomes	Vested agreement, vested governance framework, performance incentives, margin matching	Integrated: cooperative, win–win	Integrated: Behave as single entity	Interdependent outcomes, aligned, mutual gain, managed performance, long-term relationship

Key: SRM = Strategic Resource Management

Source: Reproduced from Vitasek, K., Keith, B., Eckler, J., and Evans, D. (n.d.). Unpacking sourcing business models: 21st century solutions for sourcing services. Retrieved from http://www.vestedway.com/wp-content/uploads/2012/09/Unpacking-Sourcing.pdf .

Table 9-7 summarizes the typical characteristics of performance-based and vested-based approaches.

Investment-Based Model (Insourcing)

The investment-based approach, also known as insourcing, provides an option for organizations to “make” or produce the needed functions, services, or products within their organization. This is opposed to outsourcing where the organization contracts or “buys” needed functions, services, or products from another organization.

Shared Services

Companies that struggle to meet complex business requirements using conventional transaction-based or outcome-based approaches usually invest to develop capabilities themselves (or insource). In these cases, many companies have chosen to adopt what is commonly referred to as a “shared services” structure, which is the establishment of an internal organization modeled on an arms-length outsourcing arrangement. Using this method, processes are typically centralized into a shared services organization and departments are cross-charged for the services used.

A key driver when building a shared services organization or a joint venture structure is to centralize and standardize operations that improve operational efficiencies. The results can be significant. American Productivity and Quality Center (APQC) research shows a direct correlation between low procurement cost and shared services or centralized procurement function. Specifically, companies with centralized and shared services procurement functions experience procurement costs almost one-third of those companies that have decentralized functions. 80 The chart in Figure 9-5 shows the procurement cost performance of centralized, shared, and decentralized procurement structures.

A vested outsourcing business model seeks to align the interests of the company with the interests of the service provider by following five rules of the vested approach for structuring the buyer–supplier relationship. These rules—when followed by shared services organizations—will better align the interests of internal shared services organizations with their internal customers.

FIGURE 9-5 Procurement cost performance.

Source: Reproduced from Vitasek, K., Keith, B., Eckler, J., and Evans, D. (n.d.). Unpacking sourcing business models: 21st century solutions for sourcing services. Retrieved from http://www.vestedway.com/wp-content/uploads/2012/09/Unpacking-Sourcing.pdf .

Although many shared services organizations are set up to naturally follow some of the vested rules, most shared services do not follow all five rules. Yet, research shows that doing so would create a tighter alignment and further drive efficiencies for the provider. 81 Specifically, shared services organizations and joint ventures could benefit by applying the lessons of a vested approach. Table 9-8 provides the authors’ viewpoint with regards to the maturity of shared services in applying vested principles.

Equity Partner

Some companies decide they do not have the internal capabilities necessary for the work, yet they do not want to outsource for a variety of reasons. In these cases, companies may opt to develop a joint venture or other legal form in an effort to acquire and assure mission-critical goods and services. These equity partnerships can take many different legal forms, from buying a service provider, to becoming a subsidiary, to equity-sharing joint ventures. These partnerships may require the strategic interweaving of infrastructure and heavy co-investment. Equity partnerships, by default, bring costs “in house” and create a fixed cost burden. Because of this, equity partnerships often conflict with the desires of many organizations to create more variable and flexible cost structures on their balance sheets. Table 9-9 outlines the typical characteristics of both shared services– and joint venture–type investment-based sourcing relationships.

Relating Caave to Strategic Relationships

How does this relate to CAAVE and to strategic relationships? Managers have to first determine which approach to utilize. Should the relationship remain transactional in nature, or should it be more strategic? How critical is alignment between their providers? What is the potential for value creation?

Considering the current evidence, the CAAVE approach incorporates contemporary constructs necessary for thorough evaluation of strategic relationships in a parsimonious framework. The CAAVE model rests on four quadrants (see Figure 9-6 ) while integrating relationship dynamics as well as firm compatibility based on assessment of each set of axes’ constructs. These four quadrants provide basic outcomes of the relationship (transactional as well as strategic) and the styles or behaviors that would need to be practiced by both parties to maximize the potential of the relationship. Each of these four quadrants is discussed in the following list, followed by a discussion of each of the five styles in the CAAVE model:

Table 9-8 Application of Vested Principals in Shared Services Business Models

Vested Rule	Level of Shared Services Adoption
Outcome-based vs. transaction-based	Low
Focus on the what, not the how	Medium
Clearly defined and measurable desired outcomes	Medium
Pricing model with incentives that optimize for cost/service trade-offs	Low
Insight vs. oversight governance	Medium

Source: Reproduced from Vitasek, K., Keith, B., Eckler, J., and Evans, D. (n.d.). Unpacking sourcing business models: 21st century solutions for sourcing services. Retrieved from http://www.vestedway.com/wp-content/uploads/2012/09/Unpacking-Sourcing.pdf .

Table 9-9 Attributes of Investment-Based Business Models

Sourcing Relationship	Focus	Interaction	Cooperation Level	Required Trust Level	Characterized By
Shared services	Leveraging cost and investments	Cross-company services, may include multicompany service	Integrated: Cooperative, win–win	Integrated: Dictated by equity sharing	Formal charter, intercompany governance structure, interdependent outcomes, aligned goals and objectives, managed performance, win–win relationship
Equity partner	Equity sharing	Joint venture asset-based governance framework	Integrated: Cooperative, interrelated structure	Integrated: Dictated by equity sharing	Legally bound, formal strategic partnerships, mergers and acquisitions, asset sharing/holding

Source: Reproduced from Vitasek, K., Keith, B., Eckler, J., and Evans, D. (n.d.). Unpacking sourcing business models: 21st century solutions for sourcing services. Retrieved from http://www.vestedway.com/wp-content/uploads/2012/09/Unpacking-Sourcing.pdf .

· • Value fading: Indicative of behaviors that destroy relationship trust and of incompatible cultures. For instance, the entities may have worked well together in the past, but economic circumstances changed and now they fight for resources.

· • Value holding: Typified by one party exerting its “power” to hold onto an unequal portion of the value in the relationship. In marketing literature, these firms are referred to as “channel captains” in that they hold the power and ability to dictate how suppliers will perform. This performance could be tied to new demands on packaging, shipping, or the like.

· • Value seeking: Characterized by one party taking a passive role, giving up value in hopes that the other party will be fair. In this instance there is a level of trust and a desire to work together. It is not enlightened, because one party could take advantage of the other.

· • Value building: Characterized by a balanced relationship in which both parties work under the concept “What’s in it for we?” (WIIFWe) to grow and share value created by the relationship. In this case, all of the partners share value from the relationship. It is characterized by innovation and cost reduction for the buyer, while at the same time the provider receives revenue or margin increases due to efficiencies and/or more opportunities to expand business with the buyer.

Within each of the four quadrants are five basic ways, or styles, that firms can adopt. Each of these is explained here.

FIGURE 9-6 CAAVE theoretical model.

Source: Reproduced from Ledlow, G., Manrodt, K., and Stephens, J. (2012) Measuring compatibility gaps in strategic relationships. In N. Delener, et al. (Eds.), Mapping the global future: Evolution through innovation and excellence (pp. 420–431). New York: Global Business and Technology Association.

· 1. Competitive

· • When quick, decisive action is vital to the organization (e.g., emergency situations such as a disaster or terrorism incident or accident)

· • On important issues where unpopular actions need implementing (e.g., cost cutting, enforcing unpopular rules, discipline)

· • On issues vital to company welfare and survival when you know you’re right

· • Against people who take advantage of noncompetitive behavior

· 2. Avoidance

· • When an issue is trivial or more important issues are pressing

· • When you perceive no chance of satisfying your needs

· • When potential disruption outweighs the benefits of resolution

· • To let people cool down and regain perspective

· • When gathering information supersedes making an immediate decision

· • When the relationship could be damaging to the organization and is not critical

· • When partnering or contracting seems rushed or pushed as a result of other issues; short-term strategy to buy time

· 3. Adaptive

· • When goals are important, but not worth the effort or potential disruption of competing because the situation does not allow a collaborative approach

· • When opponents with equal power are committed to mutually exclusive goals; adapting to the contract/partnership situation and creating the most advantageous position

· • To achieve temporary settlements to complex issues

· • To arrive at expedient solutions under time pressure

· • As a backup when a vested or competitive style is unsuccessful

· 4. Vested

· • May not always work (takes two to make this style work) and requires trust between parties

· • Requires the identification of a broader range of strategies, transaction costs, and longer-term goals

· • To find an integrative solution when both sets of concerns are too important to be compromised

· • When your objective is to learn and mutually benefit from the relationship

· • To merge insights from people with different perspectives

· • To gain commitment by incorporating concerns into a consensus

· • To work through organizational issues, like transaction costs, service levels, and the like that could harm a relationship

· 5. Empathetic

· • When you find you are wrong; to allow a better position to be heard, to learn, and to show your reasonableness

· • When issues are more important to others than to you; to satisfy others and maintain cooperation

· • To build social capital for later issues

· • To minimize loss when you are outmatched and lack any competitive advantage

· • When harmony and stability are especially important; when you are building up a weaker partner in the market

· • To allow subordinates to develop by learning from their mistakes

However, it is necessary to validate the inclusion of organizational theory, human dynamics, communication, and leadership into the genre of outsourcing as firms strategically seek relationships for purposes of contracts and partnerships. Williamson supports that strategic relationships need development and evolution to incorporate relationship constructs. “James Buchanan advises that economics as a science of contract is underdeveloped and that this should be rectified” 82 and “. . . additional gains can be realized if order-preserving mechanisms are devised that enable the parties to preserve cooperation during contract execution.” 83 Carter and Easton support the inclusion of constructs of strategy (sustainability), organizational culture, and transparency (stakeholder engagement) with the goal of sustainability into the evolution of the method supported by the CAAVE model. 84 The strongest guidance offered by Williamson follows:

· Interestingly, both the economist Friedrich Hayek and the organization theorist Chester Barnard were in agreement on this point, albeit with differences. Hayek (1945, pp. 526–527) focused on the adaptation of economic actors who adjust spontaneously to changes in the market. Upon looking ‘at the price system as . . . a mechanism for communication information,’ the marvel of the market resides in ‘how little the individual participants need to know to be able to take the right action.’ By contrast, Barnard (1938, p. 9 ) featured coordinated adaptation among economic actors working through administration (hierarchy). The latter is accomplished not spontaneously but in a ‘conscious, deliberate, purposeful’ way with the use of administration. Thus, economic theory meets organizational theory in the real world. 85

So, as a leader, how do you apply a style for specific strategic relationships? An overview and application context of the CAAVE model styles follows. These five styles are competitive, avoidance, adaptive, vested, and empathetic (see Figure 9-7 ). The CAAVE Model enables assessment, initially based on market dynamics (includes consideration of Transaction Cost Economics, or TCE) and basic relationship dynamics. This assessment offers recommendations of styles for firms to utilize within the buyer–supplier relationship.

Integrating the CAAVE model styles with Williamson’s styles within the quadrants (with suggested styles for each quadrant) is the next focus of the model (see Figure 9-8 ). Style migration within quadrants is expected in the model. It is important to note that Nash’s Win–Win model integrates the CAAVE model only in the upper-right corner of the model (specifically, the Value Building quadrant).

FIGURE 9-7 Style selection for CAAVE based on market (TCE included) and relationship dynamics.

Source: Reproduced from Ledlow, G., Manrodt, K., and Stephens, J. (2012). Measuring compatibility gaps in strategic relationships. In N. Delener, et al. (Eds.), Mapping the global future: Evolution through innovation and excellence (pp. 420–431). New York: Global Business and Technology Association.

The CAAVE model integrates Nash’s and Williamson’s concepts within a flexible framework. Once firms assess their strategic outsourcing relationship considering their compatibility or alignment between styles, then assessments can be conducted for deeper relationship dynamics and compatibility, as well as trust. As firms are assessed either in the Value Building quadrant or close to that quadrant, the integration of Nash’s Win–Win situation is realized. You can utilize the appropriate style based on the quadrants you assess your strategic partner (or potential partner) to be in. The goal is to move strategic partnerships into the Value Building quadrant or area, which focuses on the vested style to build strategic relationships.