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Chapter Objectives After reading this chapter, you should be able to
Identify the four primary functions of strategic planning.
Summarize how mission and vision statements are developed.
Outline the strategic planning phase of analysis and diagnosis in health care administration.
Identify the primary goals and corporate strategies available to health care organizations.
Describe the strategic planning process of implementing a strategy.
Chapter 1 described how directing health care organizations requires application of the five basic managerial functions: planning, organizing, staffing, directing, and controlling. This chapter delves more deeply into the strategic planning function. As the first step in the management process, effective planning is a key element of organizational success in health care.
Strategic Planning 3
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Top-level management can help identify, coordinate, and implement an organization’s overall strategy, which can include a direction for the services that the organization provides.
3.1 Overview of Strategic Planning
Strategic planning is the development of a plan that integrates all organizational activities into a coherent course of action. The many types of organizations that deliver health care vary in the exact natures of their management structures, but they all tend to pursue many similar activities. Top-level executives are responsible for the oversight of the entire organization. In profit-seeking organizations, the CEO has the primary responsibility of caring for the interests of stockholders and other investors, balancing profit goals with other strategic corporate objectives. CEOs in nonprofit organizations tend to issues such as financing; however, their primary objective is to sustain organizational services and operations, rather than seeking profits as the final outcome. In smaller organizations, the top-level executive might carry the title of president or chief administrator rather than CEO.
Strategic management is a top-level management function, overseeing both the short- and long-term organizational objectives and outcomes. This function integrates and coordinates all company activities. Strategic management helps executives steer and manage a company to achieve success over time—not just for the next quarter or year, but for the long term. It includes providing direction for the organization, detailing the goods and services the organization will provide, and determining how the organization will respond to competitors within the industry. It requires an understanding of the organization’s publics and what they want (Ginter, Duncan, & Swayne, 2018). Top executives are charged with four major tasks:
1. Develop the organization’s mission and vision statements. 2. Analyze and diagnose organizational strengths and weaknesses. 3. Decide upon an overall organizational strategy. 4. Oversee the implementation of the organizational strategy at the tactical and operational levels.
To complete these assignments, top managers continually assess and reassess elements of the organization’s operations and the external environment. Let’s look at each of these four functions and how they apply to health care administration. At the end of the chapter, use your understanding of these four tasks and their applications to evaluate Case: Proactive Prevention.
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3.2 Developing Mission and Vision Statements
Seeking a common purpose or goal is part of what defines the nature of an organization. The ultimate objective of any organization constitutes its mission. A mission statement expresses the primary reasons for the formation and operation of an organization. Mission statements can evolve over time, but it is important to remember that mission statements focus on the present, whereas vision statements (which we will discuss later) focus on the future of organizations. In essence, a mission statement should answer the question, “Why does this organization exist?” Beyond any simple answer such as “to make money,” the mission statement defines the essence of the organization and its purpose (Ward, 2018).
Mission statements normally incorporate a series of elements that includes identification of an organization’s markets. A mission statement might include statements about the organization’s overriding philosophy or its concern to maintain a certain type of image, including a notion of a self-concept. In some industries, mission statements identify the products and services to be delivered and the type of technology used to deliver them. According to David, David, and David (2014), mission statements should include nine elements: an organization’s customers; products/services; market; technology; concern for survival, growth, and profitability; philosophy; self-concept; concern for public image; and concern for employees. Ward (2018) stated that “mission statements broadly describe an organization’s present capabilities, customer focus, activities, and business makeup.” Several of the elements discussed here can be seen in the mission statements of health care organizations displayed in Table 3.1.
Table 3.1: Mission statements
Organization Mission statement
AmerisourceBergen To build shareholder value by delivering pharmaceutical and healthcare products, services and solutions in innovative and cost effective ways. We will realize this mission by setting the highest standards in service, reliability, safety and cost containment in our industry.
Becton, Dickinson and Company To help all people live healthy lives.
Bristol-Myers Squibb To discover, develop, and deliver innovative medicines that help patients prevail over serious diseases
Cancer Treatment Centers of America CTCA is the home of integrative and compassionate cancer care. We never stop searching for and providing powerful and innovative therapies to heal the whole person, improve quality of life and restore hope.
Coventry Health Care
Our mission is to provide high-quality care and services to our members and to be profitable in the process. Coventry Health Care is also committed to maintaining excellence, respect, and integrity in all aspects of our operations and our professional and business conduct. We strive to reflect the highest ethical standards in our relationships with members, providers, and shareholders.
CVS Corporation We will be the easiest pharmacy retailer for customers to use.
Hospital Corporation of America (HCA)
Above all else, we are committed to the care and improvement of human life. In recognition of this commitment, we strive to deliver high quality, cost effective healthcare in the communities we serve. In pursuit of our mission, we believe the following value statements are essential and timeless. We recognize and affirm the unique and intrinsic worth of each individual. We treat all those we serve with compassion and kindness. We act with absolute honesty, integrity and fairness in the way we conduct our business and the way we live our lives. We trust our colleagues as valuable members of our healthcare team and pledge to treat one another with loyalty, respect and dignity.
Kindred Healthcare
The Compliance and Quality Committee is appointed to assist the Board of Directors in monitoring (1) the Company’s compliance with applicable laws, regulations, and policies; (2) the Company’s compliance with its Corporate Integrity Agreement and its Code of Conduct; and (3) the Company’s programs, policies and procedures that support and enhance the quality of care provided by the Company.
McKesson Corp. Our mission is to provide comprehensive pharmacy solutions that improve productivity, profitability and result in superior patient care and satisfaction.
National Association of Long Term Hospitals The National Association of Long Term Hospitals (NALTH) leads the industry in advancing the health, well-being and understanding of patients who require a prolonged hospital stay and specialized programs of care to achieve medical stability and maximum function.
Adapted from “Fortune 500 Mission Statements,” n.d. (https://www.missionstatements.com/fortune_500_mission_statements.html).
Accompanying a mission statement will be an organization’s vision statement, which outlines the organization’s intended future. The vision statement offers direction about where the organization seeks to go and what executives hope the organization will become and achieve (Kantabutra & Avery, 2010). Many times, such statements exclude a financial component, because such words might not appeal to all internal and external publics. In the new millennium, many strategic vision statements have incorporated concepts regarding globalization and the use of Internet technology to build toward the future. A health care organization’s website is one of the first places customers may encounter its mission. Consider the example in Web Field Trip 3.1.
Vision and mission statements provide the basis from which all strategic, tactical, and operational planning begins. Effective top-level executives routinely examine and revise such statements as needed. Hospital administrators are advised to view these statements in light of the services the organization intends to provide to both the local community and the larger medical profession. In addition, it is important they are not confused with each other. For example, the mission and vision statements for the highly regarded Barnes-Jewish Hospital (https://www.barnesjewish.org/) in St. Louis, Missouri, are as follows:
Mission We take exceptional care of people.
By providing world-class healthcare By delivering care in a compassionate, respectful, and responsive way By advancing medical knowledge and continuously improving our practices By educating current and future generations of healthcare professionals
https://www.barnesjewish.org/
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Vision Barnes-Jewish Hospital, along with our partner, Washington University School of Medicine, will be national leaders in medicine and the patient experience. (Barnes Jewish Hospital, n.d.)
Sometimes mission and vision statements are the implicit guiding force of an organization, but sometimes they are used explicitly to reinforce employee behavior as well as to guide day-to-day operations. A Florida hospital system’s CEO, for example, required that all employee badges have the mission and vision statement showing. In addition, employees were required to memorize both statements, and the CEO often stopped people in the hall to ask them what these systems were. His reasoning for doing this was to ensure that all employees followed the mission and vision of the organization in their everyday duties. Mission and vision statements might begin as follows:
The mission of ABC Hospital is to . . . The vision of ABC Hospital is to . . .
Web Field Trip 3.1
A health organization’s website typically includes a page devoted exclusively to explaining its mission, vision, and values. The images and messaging throughout the entire website are also used to reflect this information. As an example, visit the Seattle Children’s Hospital website (https://www.seattlechildrens.org/) .
Under the “About Us” tab at the bottom of the home page, select “About Seattle Children’s.” On the right side of the screen under “Also in This Section,” click on “Our Mission, Vision and Val-ues.” After reading the mission statement, revisit the hospital’s home page.
What are the main points of the Seattle Children’s Hospital mission statement? How does the hospital employ its home page to portray the ways in which it is achieving its mission?
https://www.seattlechildrens.org/
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3.3 Analysis and Diagnosis of Organizational Strengths and Weaknesses
Analysis and diagnosis are critical parts of the strategic planning process. During this stage, top management often assesses internal and external factors that can influence the direction of the organization and how it achieves its mission. Two common methods of analyzing and diagnosing an organization’s relative strengths and weaknesses are through SWOT and the Five Forces Model.
The SWOT Model
The SWOT model, which was briefly introduced in Chapter 1, offers one common method of investigating internal company operations and the external environment. Examination of internal operations yields understanding of the organization’s strengths and weaknesses (the SW in SWOT). Analysis and diagnosis of the external environment reveals opportunities and threats (the OT) (see Table 1.4).
Analysis and diagnosis of the organization’s strengths and weaknesses require managers to take a step back to avoid “turf wars” between various branches and departments, and other forms of political activities that would disrupt the objective evaluation of operations. Table 3.2 provides areas that managers should consider when carrying out the SW part of analysis and diagnosis.
Table 3.2: Internal assessment of strengths and weaknesses
Department Factors to consider
Production Quality of medical care Efficient delivery of services Follow-up after patients leave
Marketing Advertising programs
Community relations Public relations activities Community support Outreach and screening programs
Finance Ability to acquire equipment Ability to upgrade facilities
Accounting On-time and accurate billing practices On-time and accurate payment methods
Human resources Relationships with physicians Satisfaction indicators of internal staff (e.g., rates of absenteeism, tardiness, turnover, accidents, grievances, vandalism)
Research and development
Methods of diagnosis Treatment programs Medicines Surgical instruments
Chapter 1 also outlined an analysis of semi-controllable and noncontrollable forces in the external environment. Semi-controllable forces affecting health care include patients or customers, suppliers, the local community, financial institutions, unions, and stockholders or partners. Noncontrollable forces are the political, social, economic, technological, and competitive factors that health care managers study and create responses to. The combination of these factors results in the potential combinations displayed in Table 3.3.
Table 3.3: Outcomes of a SWOT analysis
Internal company
Strengths Weaknesses
External environment Opportunities Pursue with a strategy
Consider investing resources in order to pursue with a strategy
Threats Monitor for change Create a strong strategic response
Based on information from Perspectives on Experience, by Boston Consulting Group, 1970.
As shown in the table, when the external environment offers an opportunity in an area in which the organization is strong, it makes sense to consider developing strategies to take advantage of the situation. Should the environment present an opportunity in which the hospital or health care provider has weaknesses, managers may consider investing funds to create a stronger internal operation and then pursue a strategy related to the opportunity.
For example, if the population of a small suburban community were to suddenly and dramatically increase (an opportunity), and the local hospital has an effective top management team, then the organization’s leaders might consider a diversification strategy. This strategy might involve adding new specialties, such as a heart center, birthing center, or cancer center, in order to increase revenues and grow the size of the organization. It could also include partnering with a larger health care system to gain more financial options and be more flexible in adapting to changes in systems and requirements. In the same setting, if the hospital were to experience difficulties in attracting physicians to work for the organization or to seek privileges in that facility, the management team might consider finding ways to improve recruiting programs in order to strengthen the internal organization, or form a relationship with a medical school or university to provide teaching opportunities for students. Such strategies could then allow the hospital to grow to accommodate the needs of an increasing population.
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When the environment presents a threat in an area of company strength, the top-level management team will often continue to assess the situation before taking any major strategic action. If, however, the threat is powerful in an area of organizational weakness, a strategic response would be required; without such a response, the organization might not survive. For example, a turbulent financial environment characterized by rising unemployment and high interest rates on debt could strongly threaten a health care facility facing cash flow and liquidity problems. In that circumstance, a response such as a merger with a more financially sound organization may be the only way to continue operations (Robbins & Coulter, 2012, p. 228).
A Closer Look: SWOT Analysis
This video considers how and why an organization might apply a SWOT analysis.
Critical Thinking Questions
What two factors of SWOT are internal, and what two factors of SWOT are external? What is the importance of a SWOT analysis?
The Five Forces Framework
In addition to a SWOT analysis, managers in health care settings may also use the Five Forces Framework. The approach, as developed by Michael Porter (1980), outlines industry-specific factors that influence the management of an organization—in this case, a health care operation. The five factors are
the threat of new entrants, barriers to entry, the degree of substitution possible, supplier power, and buyer power.
These five factors combine to indicate the level of industry intensity, or rivalry, which summarizes the degree of competition for customers (in this instance, patients and “market share”). Industry intensity poses the greatest potential threat to an organization. The stronger the level of rivalry, the lower revenues and potential profits become.
New entrants create rivalries because they can reduce the market share held by established organizations, which in turn increases price competition (lowering charges for medical services so that patients won’t leave). At the level of an individual physician’s practice, new entrants, or new phyicians offering the same services, constitute the primary threat. As organizations increase in size, such as large community hospitals, the potential for new entrants lessens. Barriers to entry, or the influences that prevent new competitors from entering a market, occur at this level due to the barriers displayed in Table 3.4.
Table 3.4: Barriers for new entrants
Barrier Description
Economies of scale The existing hospital delivers the same service to a large number of patients, which means fixed costs can be allocated to a large number of people.
SWOT Analysis From Title:
The Business Plan (https://go.openathens.net/redirector/ashford.edu?
url=https://fod.infobase.com/PortalPlaylists.aspx?wID=100753&xtid=41113)
© Infobase. All Rights Reserved. Length: 00:51
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An organization that patents a new pharmaceutical drug will have maximum supplier power because it is the only provider.
Government restrictions Local and state boards may limit the number of licenses to practice in a geographic area.
Brand power Patients in the area become loyal to a given facility.
Exclusive or long-term agreements These are existing contracts among physicians, other organizations, and suppliers.
Threat of retaliation Existing health care facilities may take action to challenge new entrants.
The degree of substitution present either allows or restricts patients from seeking the same or a similar service from another organization. For example, if a community has numerous physical rehabilitation providers, patients enjoy additional choices in selecting the facility to attend. The presence of substitutes drives down prices and increases competitive rivalry. Conversely, higher switching costs (the amount a person pays to change providers, in terms of time, money, and effort to transfer medical records) lower competitive rivalries.
Supplier power results from an organization’s exclusivity in providing a product or service. When a pharmaceutical company develops and patents a superior medicine that no other company provides, supplier power reaches a maximum; this company is the only available supplier. When a company is the only supplier, it could affect costs; for example, the cost of such essential medicines as an EpiPen might increase. The same holds true for any manufacturer of advanced medical equipment. Logically, suppliers seek to keep prices higher, which can reduce competitive rivalries among providers offering the item.
Buyer power arises when consumers (patients) experience alternative choices. An individual who believes a choice exists between chiropractic care and other forms of medical service providers enjoys buyer power. When groups of consumers hold the same power, competitive rivalries increase, and amounts charged for services tend to become lower.
In addition, nonmarket structural characteristics affect competitive rivalries. These characteristics include levels of fixed costs, the presence of excess capacity, product similarity or differentiation, and the nature of the sales process (Luke, Walston, & Plummer, 2004). Excess capacity drives down the prices that organizations can charge, thereby increasing competitive rivalries. The same takes place when products are similar—prices become reduced as rivalries rise. Certain sales procedures also intensify competition.
At the completion of a SWOT analysis or a competitive analysis featuring the five main forces, health care executives should have a solid understanding of the organization’s current position with regard to internal activities, the industry, and the organization’s external environment. At that point, it should be possible to select potential strategies to consider.
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3.4 Strategic Direction
Top-level managers are responsible for the overall strategic direction of the organization. They develop strategic direction through analysis and diagnosis as well as an understanding of the organization’s strategic goals, which are likely to be varied, complex, and often interconnected.
Strategic Goals
In Chapter 1, a set of strategic goals for health care was introduced using the framework provided by Drucker (1972). Outcomes of these goals are listed in Table 3.5.
Table 3.5: Health care strategic goals and intended outcomes
Strategic goals Intended outcomes
Market share Acquiring patients for a physician or hospital in a community
Innovation New or improved medical services that enhance patient care
Productivity An ample number of patients served per physician, nurse, or department An increased number of patients who can be seen daily An adequate number of procedures needed to meet financial goals
Physical and financial resources Adequate funds for the most modern, advanced equipment
Profitability Profits in profit-seeking organization Enough funds for nonprofits to continue operating effectively
Manager performance and development Continuing to improve staff management Continuously sharing and exemplifying the mission/vision of the organization Leading with integrity and passion for internal and external stakeholders
Employee performance and attitudes Employee satisfaction with the organization, occupation, pay, benefits, and coworkers Commitment to patient care Commitment to the mission and vision of the organization Retaining quality employees Creating competency tools to ensure staff meets expectations and reduces risks
Social responsibility Ethical medical and financial practices by the organization
Market share can be established in a variety of ways, depending on the organization’s circumstance. A large city may define the overall market for an urban hospital. A rural health care organization might view a share in a county or a portion of a state as its market.
Innovation opportunities in health care are abundant. The delivery of health care invites innovative medicines, treatment systems, delivery systems (such as telehealth), accounting practices, fundraising programs, and many others.
Productivity efforts require balance. Managers seek to achieve efficient delivery rates while tending to patient needs. No one likes the feeling of being treated as a number or simply as a task to be completed. Consequently, human interaction and efficient medical care must achieve some type of equilibrium in health care organizations.
Physical and financial resources include the actual health care building or facility, medical equipment, computer systems, and other major long-term assets. Financial resources such as major gifts, revenues from operations, stock sales, loans, and leases help obtain the high-quality major assets needed to support medical organizations.
Profitability standards most clearly apply to for-profit organizations. However, even nonprofits must generate revenues and funds to continue operations. One of the primary responsibilities of top management is to ensure solvency, if not profitability.
The concept of manager performance and development contains many unique aspects. In situations where physicians supervise medical students and medical residents, a primary part of the job involves teaching, training, and the correction of mistakes. In other parts of the hospital, management of such activities as accounting and facilities care more closely resemble those in other industries. Creating managerial toolboxes to help current and future managers and leaders evolve and grow is an effective way to develop talent, especially in those who are promoted internally into such roles.
Employee performance and attitudes are often even more critical in a health care environment. For example, the unique nature of a hospital, which remains open 24 hours per day, 365 days per year, requires that some employees work third shifts (12 a.m. to 8 a.m.), weekends, and holidays. High levels of stress are routine in such organizations, both in key parts of the year, such as the flu season, and in the basic nature of some jobs, such as assisting in an emergency room. Other medical practices are able to close on the weekends and hold more normal operational hours. The difference in working hours can lead to inevitable comparisons by individuals who could work in either situation, such as nurses and office staff members. Maintaining morale constitutes a primary strategic challenge for many health care managers and organizations.
Social responsibility is of course often highly visible in health care. The environment is often fast-paced all while people’s lives are at stake. Health care workers and organizations must seek to effectively address the needs of the public in a safe, effective, and also ethical manner.
Two additional strategic objectives of particular importance to the health care environment are accreditation and community acceptance and involvement. Achieving these goals is often dependent on achieving the goals we just discussed. Let’s look at each of these in more depth.
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Employees at hospitals often work long shifts and deal with high stress levels, which can make maintaining employee performance and attitudes a strategic challenge for these organizations.
Accreditation Most health care organizations also pursue accreditation as part of an overall strategic effort. Accreditation is the process health care providers go through to ensure they meet specified standards across a range of services. Two of the primary benefits of accreditation are (1) strengthening of patient safety and quality care efforts and (2) increased community confidence in the quality and safety of care and treatments. Having these important benefits securely in place through accreditation allows organizational managers to pursue other activities, including various innovative strategies. Additional benefits of accreditation include a stronger image in the marketplace that can be advertised and promoted to the general public, greater patient confidence in the organization, meeting state requirements, improved morale in the workforce, and assurance of quality and continuous improvement that result from pursuing accreditation status.
One major accrediting agency for health care in the United States is The Joint Commission (https://www.jointcommission.org/) , an institution that maintains accrediting activities for several types of health care organizations, including the following:
Ambulatory health care Behavioral health care Critical access hospitals Home care Community hospitals Laboratory services Nursing and rehabilitation services Diagnostic imaging facilities
The accreditation program provided by The Joint Commission includes certification programs for disease-specific care, advanced disease–specific care, palliative care programs, and health care staffing services. The organization also offers certification fact sheets designed to raise the quality of professional care in these activities. The Joint Commission assists organizations pursuing accreditation by developing and distributing standards for each type of organization. Site visits then ensure that the standards are being met. Performance measures and accountability measures are key elements in the accreditation system.
Community Acceptance and Involvement Community acceptance and involvement are vitally important strategic outcomes for all health providers. Positive perceptions of an individual medical practice or overall organization (the organization’s image) are essential to success. Part of a strategic effort involves building bonds with community leaders and enhancing image in various ways, such as community health fairs; free screens for colon, breast, and prostate cancer; and flu shots. The failure to do so can lead to the organization’s demise.
The Corporate Strategy
A corporate strategy states the type of business or operation that the organization is in or seeks to be in, along with any changes that management hopes to achieve in the future (Grant, 1998). The size of the organization dictates the types of strategies that managers can pursue. Large hospitals and other major health care institutions manage portfolios of activities with the largest range of strategic options available. Smaller providers have fewer potential strategic choices. In both types of facilities, however, managers make decisions regarding the organization’s overall strategic direction, as well as how the organization will compete in the marketplace.
At the broadest level, the three main categories of corporate strategies are those designed to (1) create growth, (2) achieve stability or slow growth, and (3) cope with decline or a more unfavorable environment (Thompson, Strickland, & Gamble, 2005). The strategies displayed in Table 3.6 often apply to the management of health care portfolios. They may also be adapted to practices of individual physicians or groups of providers operating as one unit.
Table 3.6: Types of strategies
Strategy type Examples
Growth Diversification Merger and acquisition Horizontal integration or joint venture
Stability Efficiency Slow growth Understanding the demands of the market Not taking on additional debt projects Partnering with diagnostic centers vs. repairing and replacing aging equipment
Decline Divestment Liquidation Turnaround
Adapted from Five Functions of Effective Management (2nd ed., Table 2.6), by D. Baack, M. Reilly, and C. Minnick, 2014, San Diego, CA: Bridgepoint Education.
Growth Strategies
https://www.jointcommission.org/
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If a dentist decides to sell his or her practice to another dentist, this divestment strategy can include transitioning patients and their records to the new dentist.
In many circumstances, health care organizational leaders encounter circumstances that make expansion possible and even advisable. Table 3.6 displays the general choices that are available as growth strategies.
Diversification involves adding new products and services. In the case of health care, a new form of medical treatment or increased specialization in a medical area results in diversification. A hospital that adds a walk-in clinic for nonemergency medical concerns to its emergency room services engages in diversification. The advantages of diversification include strengthening the range of care offered to the public, which might result in increased loyalty to the organization—someone with a number of afflictions might think first of a diversified facility. Naturally, some costs will be incurred when expanding a range of services. In addition, the organization runs the risk of damaging its reputation should the new practice be substandard or flawed in some way (Ramanujam & Varadarajan, 2006).
Mergers and acquisitions take place when two health care facilities combine under one ownership or governance structure. Physicians often combine practices to create a group structure, such as when two or more urologists form a practice partnership that specializes in that type of treatment. Doing so allows the physicians to combine resources to purchase equipment and develop a more efficient support staff for their collective practices. Efficiencies in scheduling, filing insurance claims, and other activities can result. In more dramatic instances, two separate health care institutions can come together to form one unit. Such an effort may lead to reductions in redundant employee tasks and activities, which in turn lead to a reduced staff and payroll. Although the short-term effects on employee morale can often be negative due to the accompanying uncertainty and downsizing, mergers and acquisitions are done for long-term sustainability and better negotiating positions with managed care companies.
Horizontal integration means combining with competitors (Colangelo, 1995)—for example, two competing hospitals in an area providing joint services for a rare illness or affliction. Duke University Hospital and UNC Healthcare in the Research Triangle Park area of North Carolina serve as a good illustration of this dynamic. Horizontal integration can provide a series of benefits to both organizations, such as efficient use of administrative time (and resultant costs), reductions in duplications of services between the two facilities, strengthening of the marketing power of both organizations, and allowing physicians with privileges in both organizations to better manage their time. Another example is a health care facility that had previously provided some access to prescriptions integrating with a pharmacy to combine their businesses and clientele lists.
Stability Strategies Organizations tend to pursue stability strategies when no new strategic opportunities have been identified. The primary intent is to continue offering the same services to the same individuals and markets while sustaining other business operations. Two stability strategies include efficiency and slow-growth approaches.
Efficiency strategies seek to reduce costs, which leads to increased profitability for profit-seeking organizations and the ability to charge lower fees in nonprofit health providers. Should a management team find a way to lower clerical costs, energy usage, or waste in the storage of medical supplies that have limited shelf lives, then the organization may create a strategic advantage through efficiency. This strategy may be especially effective in a stagnant economy or in an area in which no real growth of any kind is present— either in the population or among those seeking a specific type of health care service.
Slow-growth strategies are chosen when the organization will become larger, but at a dramatically reduced rate when compared with the growth strategies mentioned earlier. When a health care provider operates in a geographic area with an increasing population, it becomes possible to increase patients and revenues simply by keeping pace with that growth. New physicians and caretakers are added, but only to provide services that keep pace with demand, not to expand demand.
Slow-growth strategies are also employed when an organization tries to build its market share. Should one hospital increase the number of patients requesting it when an emergency vehicle arrives, its market share will grow over time, along with its revenues. Many physicians find that, through referrals and other endorsements, their practices grow at a manageable rate. Current marketing tactics that assist in this type of slow growth include building a strong presence on the Internet and making sure that patient reviews are positive on various review sites and social media outlets.
Another type of slow-growth strategy involves the gradual expansion of existing operations to a larger geographic area. For instance, a hospital may decide to add satellite clinics to its overall organization under the umbrella of its present governance. These new locations then generate growth. Such an approach may be termed concentric slow growth—that is, building out from the center of operations to an expanded service area.
Decline Strategies When economic conditions become harsh or when other dramatic negative circumstances arise, top managers may have to consider various types of decline strategies—that is, shrinking the scope of the organization. Divestments, liquidation, and turnaround strategies constitute the primary options.
A divestment involves selling a portion of an organization to another entity, leaving that portion intact to continue operations. Larger hospitals may, at times, divest practices of physicians that are owned by the organization. Reasons for doing so include physician retirement or concerns about the quality of care provided by the individual physicians. Dentists and mental health professionals often sell their entire practice, including the records and files of all patients, to other practitioners. Patients can then decide whether they wish to retain the new owner.
A liquidation results in the dissolution of an activity. In this instance, a specific medical practice within an organization is dismantled, office equipment and other furnishings are sold, and the operation ceases. A larger health care institution might liquidate an unprofitable or troublesome unit. A retiring physician or practitioner group might liquidate an individual or joint practice.
Turnaround strategies focus on the concept of “smaller but stronger.” Doing so may mean retrenchment, or a reduced organizational size, in the short term but with the goal of growing stronger in the long term. Turnaround strategies include reductions in the following:
Regions or geographic areas served Specific operating locations Products and services offered Personnel
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Rarely would a health care turnaround operation be of significant enough scope to resort to leaving an entire geographic region. A hospital may, however, reduce satellite operations if specific sites are not generating sufficient revenues to justify their existence. The same would be true for reductions in health care services that units provide. Most often, unfortunately, retrenchment in health care means reductions in medical and support staff in times of fiscal crisis.
Competitive Strategies
Strategic managers also make decisions about how individual units and the overall organization will compete most effectively with others in the marketplace. Two ways that organizations can distinguish themselves in the market to gain a competitive advantage is through pricing or branding, which are outlined in cost-leadership competitive strategy and differentiation strategy, respectively (Porter, 1985).
A cost-leadership strategy states that the company will seek to deliver services that are less expensive than those of competitors. Rarely would such an approach be viable in the health care industry, because patients find it difficult, if not impossible, to distinguish the price of any service other than a routine visit to the physician with a set copay. In all other instances, the health care organization charges a large amount that becomes subject to a provider write-off and established insurance payment amounts to physicians. The cost then depends on whether the individual has met the deductible amount. In addition, most people prefer not to seek out medical attention “on the cheap.” Although many, if not most, people wish to manage the costs, they still desire the highest quality possible. In the minds of most consumers, price still implies quality, and this holds true in health care.
In contrast, a differentiation strategy means the organization will try to deliver services that are different from and better than the competitors’. Health care groups often emphasize differentiation by stressing the qualifications of their physicians, the quality of up-to-date equipment, some dental appliances, and the caring environment in which care will be delivered.
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3.5 Implementation of Strategy
An organization’s strategic direction requires the CEO or president, in combination with the top-level executive team, to work diligently on follow-through, making sure any strategy chosen will be fully implemented. In larger organizations, such as community hospitals, the board of directors follows a more formal or structured process to oversee the development and implementation of strategies prepared by the CEO and executive management team. In other settings, managers may prepare and carry out strategies without such oversight. As a standard planning practice, implementation can be directed by the “five Ws and an H” questions:
Who will direct the implementation of the strategy at the strategic, tactical, and operational levels? A health care manager who decides to incorporate a new service (diversification), such as child care for visitors of patients on both weekdays and weekends, may not oversee the development of the unit. Instead, the manager may assign the task to the individual who will eventually manage that unit.
What is to be done? An implementation program should carefully list and sequence all necessary outcomes. A goal-setting program or planning timeline can establish benchmarks for when each task should be completed.
When should the task start and end? The decision to undertake and implement a strategy only begins the process. Effective strategic management assigns reasonable starting times and completion dates for the major event. Again, a goal-setting program can help develop the time frame for full implementation. In some instances, the strategy may take years to fully complete.
Where are tasks to be performed? In many instances, the primary facility will be the only place involved. In other cases, however, a series of locations may be part of the process.
Why are these tasks needed? Effective implementation includes providing the rationale for the strategic choice to all publics. Each operating unit should have the plan explained to it, along with the reasons for the choice. This provides an opportunity not only for questions and feedback but also for buy-in and participation in the process. When this occurs, morale may increase as employees feel a greater sense of empowerment during implementation.
How are things to be performed? This final element adds in all of the other details. Implementation of a strategy involves the preparation of tactical and operational plans that seamlessly integrate with the strategic direction top management has chosen to pursue.
Tactical Planning
A strategy outlines the major activity or activities the organization will pursue. Tactics are the plans designed to support strategies (Reilly, Minnick, & Baack, 2011, pp. 41–43). For example, managers in a hospital who have chosen to diversify by adding a wellness center to the hospital’s current services should then devise the tactics that will support the plan and assist in its implementation. In this example, tactics could include the following:
Retaining an architect or facilities manager to create the physical space needed Hiring a manager to oversee the unit and unit employees (human resources) Creating guidelines that specify the types of wellness activities involved (medical staff) Coordinating with other departments (radiology, laboratories, and physicians) Establishing marketing programs to publicize the new program (marketing) Setting up fees and payment systems for those who use the program (accounting)
These activities are carried out by managers in the various functions noted here. Once the tasks have been assigned, first-line supervisors can finalize the most specific elements as operational plans.
Operational Planning
Managers within each unit of a health care organization, no matter how large or small, devise operational plans to direct their units. An effective strategic management program ensures that operational plans align with organizational strategies and tactics. Three primary operational plans are budgets, projects, and programs.
A budget is an annual financial plan. Strategies often require additional resources or the redirection of resources from one area, department, or activity to another. The accounting manager works in conjunction with managers at all levels to make sure adequate funds have been allocated to any new strategic endeavor.
A project is a plan for a one-time activity. As an example, consider a gynecological practice with three physicians. The organization’s management team decides to diversify by adding urological services. Several tactics would be part of such an expansion. After diversifying, however, the organization may discover that its parking lot requires more spaces to accommodate the additional number of employees and patients. The project involved would be the design, property acquisition, and completion of the new parking area. Once the lot has been finished, the project is complete. For that reason, projects are also referred to as single-use plans.
Programs are sets of projects with an ongoing outcome. A wellness program includes the projects and tactics noted earlier. When the individual projects have been completed (new physical space, advertising blitz), the wellness program can continue in operation. New projects associated with maintenance of the program may then arise over time.
A strategic management program experiences the greatest chances for success when the three levels of planning—strategies, tactics, and operational plans—align with each other. To achieve this outcome, managers must employ various methods that link the levels of planning.
Links Between Levels of Planning
To help ensure that an organization stays on course and avoids drifting from the chosen strategy, managers must formulate various documents that express the organization’s vision, mission, and values over time. Policies, functional-area policies, and procedures assist in keeping the organization on course. Furthermore, various programs, including management by objectives and a means–ends chain, can help the organization maintain its strategic intentions.
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A nondiscrimination policy is an example of an organizational effort to emphasize diverse hiring decisions and equal patient care.
Policies, Functional-Area Policies, and Procedures
A policy is a sweeping organizational guideline. As an example, a health care provider may establish the policy that the organization will seek to emphasize diversity in all of its hiring decisions and patient treatment practices by trying to provide services to every element of a local community. Such a directive influences human resources most directly but also affects every other part of the organization.
A functional-area policy translates the policy to an individual function or activity. The diversity program designated by a policy would translate into pricing and accounting practices to help ensure that lower-income groups have access to the facility. The marketing team would try to make sure that the organization transmits the policy clearly to all publics. Human resource efforts to reach minority groups in recruiting programs would become part of the effort to implement and maintain the policy.
Procedures, or task instructions, carry out functional-area policies in individual units. To ensure that low-income patients can afford medical care at a given facility, the accounting team might establish a specific pricing program based on the individual’s annual level of pay. Marketing might include the statement “We are an equal opportunity employer” in every advertisement or communication piece.
Well-managed strategic planning processes integrate strategies, tactics, and operational plans with policies, functional- area policies, and procedures. When these elements stay in sync, individual employees, units, and the entire organization can better pursue the organization’s ultimate objectives.
Management by Objectives Management by objectives (MBO) is a well-established management system that has been used to integrate levels of planning. MBO creates an annual program designed to facilitate communication and goal setting (Anthony, 1978; Drucker, 1954) and offers a participative goal-setting program to organizational leaders. It begins with individual employees at each rank. The core of management by objectives consists of these steps:
1. The individual restates the primary emphasis of his or her job. 2. On an annual basis, the employee creates a list of goals for the upcoming year. 3. The employee’s supervisor then creates a goal list for the employee. 4. The employee and supervisor meet and agree to the final goal list for the next year. 5. At regular intervals throughout the year, the supervisor and employee follow up to ascertain which goals have
been met and which still require attention.
Many companies establish the goal-setting program using the calendar year, which means goals are set in December or January and results are examined 12 months later. Other organizations set goals during off-season periods or on a fiscal calendar basis, which may begin in June or some other month. The key ingredient, in many ways, is the fourth step, in which the employee and supervisor meet and agree to a goal list. This participative element can create a stronger bond between the two individuals and lead to greater effort to achieve the established objectives.
MBO integrates company activities through the goal-setting system. Entry-level employees meet with first-line supervisors to establish goals; first-line supervisors negotiate their goals with middle managers; middle managers finalize goals with top-level executives. Each level sets goals that mesh with the goals of those at higher ranks, which helps keep the strategic planning system on track. To attain the highest levels of success, the MBO program should follow the prerequisites or system requirements noted in Table 3.7.
Table 3.7: Prerequisites for successful management by objectives programs
Prerequisite Explanation
Top management support CEOs and top managers endorse and engage in the program.
Sufficient resources Managers must be able to reward those who achieve their goals.
A systematic approach Plans are set and goals are measured at the same time each year.
A simple system A small number of goals (usually fewer than 10) is set to make progress easy to track.
Quality objectives Goals should be difficult but attainable, measurable, clearly stated, and revised when necessary.
Two types of objectives Employees should establish (1) personal-enhancement goals and (2) goals they pursue on behalf of the organization.
Patience MBO programs take time to establish and refine.
From MBO II: A System of Managerial Leadership for the 80s, by G. S. Odiorne, 1979, Belmont, CA: Fearon Pitman.
The ideal MBO system establishes quality performance incentives for all employees. The best programs make sure that personal-enhancement goals mesh with organizational goals. For example, should an employee establish the goal to become fluent in a second language, that individual becomes more valuable to the organization and should be rewarded accordingly. An employee who successfully achieves an organizational goal should also receive a reward for doing so. Many MBO programs have been successfully adapted to health care organizations.
Means–Ends Analysis
Another program designed to foster organizational consistency is a means–ends chain. In the system, means are plans, and ends are goals. The ultimate end of an organization—
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its mission—drives the development of goals at the functional and individual levels, as displayed in Figure 3.1.
As the ends (goals) are finalized, managers then identify the means (plans) needed to reach those goals. The concept of top-down/bottom-up planning becomes the net result of a well-designed means–ends chain. The mission is broken down into smaller and smaller unit goals. At the same time, individual goals build to unit goals, which build to department goals, which ultimately seek to achieve the organization’s mission. The corresponding top-down/bottom-up process helps ensure the consistency of goals and plans at all levels in the organization.
Figure 3.1: A means–ends chain
An organization’s mission is the driving force for its department and individual goals, and it identifies the reason the organization exists.
From Management (p. 140), by A. G. Bedeian, 1986, Chicago, IL: Dryden Press.
Case: Proactive Prevention
St. Mary’s Regional Health Center conducts numerous activities as part of its overall strategic approach to health care. The main hospital offers emergency services, diagnostics, and treatments of all types. The organization operates several facilities in other locations. Recently, St. Mary’s management team, with the approval of the organization’s board of directors, created a new path.
In the past, patients would travel to the hospital or its other facilities when a health problem emerged. Someone who suspected he or she was experiencing heart or cardiovascular issues would be sent to the heart center, a patient diagnosed with cancer would be referred to the cancer treatment center, and so forth.
The top management team, after many long discussions, decided it was time for St. Mary’s to redefine itself. The concept was that members of the community and potential patients of the system should become partners in the health care process. Rather than passively waiting until an illness or injury occurs, citizens of the area should be encouraged to proactively prevent as many health problems as possible.
To help achieve this new strategic vision, the proprietors founded the St. Mary’s Wellness Center. Among the directives for the organization’s new wing were the following:
Provide low-cost health-screening tools, such as blood pressure tests and weigh-ins. Encourage healthy activities by patrons, including watching diet, managing weight, and exercising. Offer low-fee programs to help individuals engage in healthy activities, including clubs, exercise groups, and support groups. Link physical wellness to mental well-being. Establish an immunization program at low cost for flu shots, shingles vaccinations, and other similar preventive steps.
Creating this new partnership required more than public relations activities and a new building. Physicians in the community were contacted directly and asked to talk with their patients about the wellness program when giving routine physicals and when other contacts took place. Advertising the system and its benefits would take place for the next year. The St. Mary’s Wellness Center would sponsor closed-captioning of the news on two local television stations, which would provide daily reminders of its existence to viewers.
When explaining the new program to community members, two points were to be emphasized. First, real wellness, such as lowering blood pressure, eating fewer fatty foods, watching calories, engaging in mild exercise, and working to manage stress, offers direct benefits to the individual. As time passes, a person who actively engages in preventive steps would be far less prone to endure diabetes, some forms of cancer, heart problems, and other maladies.
Second, the program should assist in cutting health care costs. This benefit extends to both the patient and the hospital. When community members actively work to maintain a healthy lifestyle, they can expect to pay less for health care and lose less time to sick days away from work. The hospital benefits by reducing the need for expensive treatments and recoveries from various illnesses. As one board member put it, “This new vision for our organization cre-ates a win–win situation.”
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Questions
1. Write a mission statement that reflects this new direction for St. Mary’s. 2. Write a vision statement reflecting the new mission statement. 3. What type of strategy did the leadership team at St. Mary’s pursue? 4. Which organizations in the community might view the wellness center as a new form of competition? 5. What factors described in this chapter might affect the implementation of this new strategy?
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Summary and Resources
Chapter Summary 3.1 Overview of Strategic Planning
Identify the four primary functions of strategic planning.
Strategic management is a top-level management function, directed at the oversight of short- and long-term organizational objectives and outcomes. It integrates and coordinates all company activities. Strategic managers conduct four planning tasks: develop the organization’s vision and mission statements, analyze and diagnose organizational strengths and weaknesses, choose an overall organizational strategy, and oversee the implementation of the strategy at the tactical and operational levels.
3.2 Developing Mission and Vision Statements
Summarize how mission and vision statements are developed.
A mission statement expresses the primary reasons for the formation and operation of an organization. In essence, a mission statement should answer the question, “Why does this organization exist?” Accompanying a mission statement will be an organization’s vision statement, which outlines the organization’s intended future. The vision statement offers direction about where the organization seeks to go and what executives hope the organization will become and achieve.
3.3 Analysis and Diagnosis of Organizational Strengths and Weaknesses
Outline the strategic planning phase of analysis and diagnosis in health care administration.
Top-level managers use analysis and diagnosis to assess the organization’s strengths and weaknesses and the opportunities and threats present in the external environment. Managers may also assess industry intensity and rivalry by examining the threat of new entrants, the degree of substitution, supplier power, and buyer power. Two common methods for evaluating these aspects of the organization are SWOT and the Five Forces Framework.
3.4 Strategic Direction
Identify the primary goals and corporate strategies available to health care organizations.
Strategic goals include market share, innovation, productivity, physical and financial resources, profitability, manager performance and development, worker performance and attitudes, social responsibility, accreditation, and community acceptance and involvement. Strategic plans include the growth strategies of diversification, mergers and acquisition, and horizontal integration. Stability strategies include efficiency and slow-growth strategies. Decline strategies involve divestments, liquidation, or turnaround approaches. A cost-leadership competitive strategy focuses on the prices charged to patients, whereas a differentiation strategy seeks to provide services that are different or better.
3.5 Implementation of Strategy
Describe the strategic planning process of implementing a strategy.
Strategy implementation involves decisions regarding who will be in charge, what will be done, and when, where, why, and how. Tactics are plans designed to support strategies. Operational plans include budgets, projects, and programs. To link planning, programs, policies, functional-area policies, and procedures may be established. A management by objectives program uses goal-setting processes to create consistency. A means–ends chain links plans with goals to achieve the same end.
Key Terms Click on each key term to see the definition.
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A document that states the type of business or operation that the organization is in or that it seeks to be in, along with any changes that management hopes to achieve in the future.
cost-leadership strategy (http://content.thuzelearning.com/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover#)
A competitive strategy in which the company seeks to deliver services that are less expensive than its competitors’.
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A competitive strategy in which the organization tries to deliver services that are different from or better than its competitors’.
industry intensity (or rivalry) (http://content.thuzelearning.com/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover/books/Baack.6061.20.1/sections/cover#)
The degree of competition for customers among organizations in the same industry, as indicated by the combination of five factors specified in the five factors framework.
mission statement
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A document or statement that expresses the primary reasons for the formation and operation of an organization to answer the question, “Why does this organization exist?”
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A top-level management function that is directed at the oversight of short- and long-term organizational objectives and outcomes to integrate and coordinate all company activities.
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The development of a plan that integrates all organizational activities into a coherent course of action.
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The completion of four primary tasks: analysis and diagnosis (SWOT), generation of strategic alternatives, strategy evaluation and choice, and strategy implementation.
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An outline of the organization’s intended future.
Additional Resources Joint Commission Certification Fact Sheets: http://www.jointcommission.org/about_us/certification_fact_sheets.aspx (http://www.jointcommission.org/about_us/certification_fact_sheets.aspx)
Critical Thinking Review Questions
1. Define strategic planning. What four primary tasks are associated with the strategic planning process? 2. Describe a mission statement and a vision statement. 3. What types of strategic goals do health care organizations pursue? 4. Describe a SWOT analysis. 5. Explain the Five Forces Framework used in understanding industry-specific strategic issues. 6. Define corporate strategy. 7. What types of growth, stability, and decline strategies can health care organizations pursue? 8. Describe the differences between a cost-leadership strategy and a differentiation strategy. 9. What are the “five Ws and an H” of strategy implementation?
10. Define tactics.
A document that states the type of business or operation
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11. What three types of operational plans are parts of the strategic planning process? 12. Define policy, functional-area policy, and procedures. 13. What steps are involved in a management by objectives program? 14. Explain how a means–ends chain assists strategic planning.
Analytical Exercises
1. Create a mission statement and a vision statement for the following organizations: a medical spa that offers dermatological services a vocational rehabilitation provider in a major metropolitan area a community hospital in a county with 120,000 citizens a profit-seeking hospital in New York City
2. How would the strategic goals of market share, innovation, productivity, physical and financial resources, profitability, manager performance and development, employee performance and attitudes, and social responsibility be achieved through the following strategies?
diversification merger and acquisition horizontal integration
3. If you were asked to perform a SWOT analysis for a major hospital in Los Angeles, what opportunities and threats do you believe would be most significant? What strengths could such a hospital possess in order to take advantage of the opportunities available? What weaknesses would match the threats that would make the hospital most vulnerable in the environment?
4. Describe the level of industry intensity or rivalry that would apply to each of these medical services: pharmaceutical companies walk-in clinics in a large metropolitan area satellite clinics in a rural county in Minnesota cancer treatment practices in a city with 500,000 citizens
5. A SWOT analysis for a biotech company reveals a major opportunity in the treatment of a specific disease, due to recent advances in the understanding of the relationship between DNA and the disease. Explain how the following strategies would apply to this opportunity:
diversification merger and acquisition horizontal integration
6. Explain the differences among an efficiency strategy, a slow-growth strategy, and a turnaround strategy for a practice of psychiatrists that has formed a mental health clinic in an area suffering from a recession and subsequent rising levels of unemployment.
7. Describe how you believe each of the following should interact: strategies and policies tactics and functional-area policies operational plans and procedures
8. Explain what would happen if the concepts in each bullet item in question 7 were at odds with each other.
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