The Nature of Strategic Management
"Somehow there are organizations that effectively manage change, continuously adapting their bureaucracies, strategies, systems, products, services and cultures to survive the shocks and prosper from the forces that decimate others ... they are the masters of what I call renewal." Robert H. Waterman, Jr. The Renewal Factor
The Tale of Two Cities Continues
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness...." Likewise, it was the best of times for insured US citizens needing health care; the best health care in the world was available and continued to improve. Yet it was the worst of times for some, as health care costs continued double digit increases and nearly 48 million Americans were without health insurance.
In this age of wisdom, medical advances are astounding. Scientists may soon have a new diagnostic technique that uses scans by beams of fast-moving neutrons, making it possible to "see" aberrant cells even before the smallest tumor forms. Nevertheless, in this age of foolishness, although the percentage of Americans who smoked declined from 1965 to 1990, it has remained virtually unchanged for the past 20 years at around 21 percent contributing to health problems and placing enormous demands on the health care system. The US health care system continues to fluctuate between the best and the worst, between wisdom and foolishness, as do the two cities in this tale, Boston and Nashville.
Boston has a number of large traditional hospital systems some of which have struggled. For example, CareGroup, the health system - which included the prestigious Beth Israel Deaconess hospital - failed as an integrated system and in 2007 existed only to see to the fiduciary obligations of the system with regard to bonded indebtedness. It no longer has any clinical responsibilities. Hospitals formerly associated with CareGroup were operating essentially as independent entities sharing little more than a computer system, teaching responsibilities, and debt financing. However, at the end of 2006 Partners, the other large hospital group that includes Massachusetts General and Brigham and Women's Hospital, reported $133 million in income from operations and $5.9 billion in total operating revenue compared to $76 million and $5.3 billion in 2005. Further, not-for-profit Harvard Pilgrim, the state's second largest insurer with almost a million members, was placed into receivership (a form of bankruptcy whereby an organization can avoid liquidation by reorganizing with the help of a court appointed trustee) by the Attorney General in 2000. However, its recovery has been impressive with 26 consecutive quarters of positive financial results by the beginning of 2007.
There are more fundamental concerns as health care costs in Boston have increased more than 30 percent faster than the state's average rate over the past six years. In addition, competition among Boston hospitals has increased considerably. For example, in August, 2006 the CEO of Beth Israel Deaconess Medical Center began an Internet blog called "Running A Hospital." In one of his entries he posted the percentage of Beth Israel's patients who get infections each month from intravenous tubing (central line infections). He challenged other area hospitals to publicize their infection rates. Other hospitals did not take the challenge. Some insisted that various hospitals define infections differently and data would not be comparable. Others indicated that the data would not be useful for patients for various reasons. The CEO also suggested that Partners HealthCare was paid more by insurers because of its size and market share. The controversy, however, was tangible evidence of increasing competition in an already competitive health care market.
Encouraged by groups such as the Nashville Health Care Council (NHCC), health care companies in Nashville are capitalizing on the woes of the rest of the industry. Nashville's thriving health care sector, instead of focusing on hospitals, has focused on businesses that provide services to hospitals and health plans to help them perform better. Several years ago, the Nashville Chamber of Commerce predicted that the US health care system would have to make massive changes if it were to serve the population without bankrupting the country. To that end, the Chamber started NHCC to act as the center of a network for people interested in developing entrepreneurial health services companies.
Middle Tennessee is home to nearly 3,000 health care companies. Twenty publicly traded health care companies are located in Nashville. Nashville-based health care companies account for more than $62 billion in annual revenues and employ more than 336,000 employees world wide. Further, Nashville-based health care companies own or operate more than 40 percent of the nation's investor owned hospitals.
Observers agree that Nashville will likely remain the "Silicon Valley of Health Care" because of its rich history of entrepreneurship, strong managerial talent, and access to venture capital funding. Since 2000, Nashville health care start-ups and existing companies have secured more than $4.3 billion of venture capital and private equity financing. Nashville's leadership claims that the changing health care environment will only contribute to its health care sector strength and that it is the best of times.
After completing the chapter you will be able to:
1. Explain why strategic management has become crucial in today's dynamic health care environment.
2. Trace the evolution of strategic management and discuss its conceptual foundations.
3. Describe and explain the concept of strategic thinking maps.
4. Define and differentiate between strategic management, strategic thinking, strategic planning, and managing strategic momentum.
5. Understand the necessity for both the analytic and emergent models of strategic management.
6. Understand how an organization may realize a strategy that it never intended.
7. Understand the benefits of strategic management for health care organizations.
8. Understand the importance of systems approaches.
9. Explain the links between the different levels of strategy within an organization.
10. Describe the various leadership roles of strategic management.
Managing in a Dynamic Environment
The dramatic changes in the health care industry that began in the 1980s, marked by the implementation of Medicare's prospective payment system in 1983, continue today. As a result, health care institutions continue to face a turbulent, confusing, and often threatening environment. Significant change comes from many sources including: legislative and policy initiatives; international as well as domestic economic and market forces; demographic shifts and lifestyle changes; technological advances; and fundamental health care delivery changes. Certainly, the health care systems in Boston and Nashville, described in the Introductory Incident, as well as other domestic and international health care organizations, have had to continuously adapt to these and other changes. As suggested in the introductory quote, organizations will have to effectively manage change and become "masters of renewal" in this dynamic environment.
Coping with Change
How can health care leaders deal with change? Which issues are most important or most pressing? Furthermore, what new issues will emerge? It is likely that there will be new issues for health care organizations that have yet to be identified or fully assessed. Even more sobering, it seems certain that there will be more change in the health care industry in the next 10 years than there has been in the past 10 years.
Dealing with rapid, complex, and often discontinuous change requires leadership. Successful health care organizations have leaders who understand the nature and implications of external change, the ability to develop effective strategies that account for change, and the will as well as the ability to actively manage the momentum of the organization. These activities are collectively referred to as "strategic management." The clearest manifestation of leadership in organizations is the presence of strategic management and its activities. Strategic management is fundamental in leading organizations in dynamic environments. Strategic management provides direction and momentum for change.
Organizational change is a fundamental part of success. As health care leaders chart new courses into the future, in effect, they create new beginnings, new chances for success, new challenges for employees, and new hopes for patients. Therefore, it is imperative that health care managers understand the changes taking place in their environment; they should not simply be responsive to them, they must create the future. Health care leaders must see into the future, create new visions for success, and be prepared to make significant improvements.
The Foundations of Strategic Management
In political and military contexts, the concept of strategy has a long history. For instance, the underlying principles of strategy were discussed by Sun Tzu, Homer, Euripides, and many other early strategists and writers. The English word strategy comes from the Greek strategos, meaning "a general," which in turn comes from roots meaning "army" and "lead." The Greek verb strategeo means "to plan the destruction of one's enemies through effective use of resources." As a result, many of the terms commonly used in relation to strategy - objectives, strategy, mission, strengths, weaknesses - were developed by the military.
Long-Range Planning to Strategic Planning
The development of strategic management began with much of the business sector adopting long-range planning. Long-range planning developed in the 1950s in many organizations because operating budgets were difficult to prepare without some idea of future sales and the flow of funds. Post-WWII economies were growing and the demand for many products and services was accelerating. Long-range forecasts of demand enabled managers to develop detailed marketing and distribution, production, human resources, and financial plans for their growing organizations. The objective of long-range planning is to predict for some specified time in the future the size of demand for an organization's products and services and to determine where demand will occur. Many organizations have used long-range planning to determine facilities expansion, hiring forecasts, capital needs, and so on.
As industries became more volatile, long-range planning was replaced by strategic planning because the assumption underlying long-range planning is that the organization will continue to produce its present products and services-thus, matching production capacity to demand is the critical issue. However, the assumption underlying strategic planning is that there is so much economic, social, political, technological, and competitive change taking place that the leadership of the organization must periodically evaluate whether it should even be offering its present products and services, whether it should start offering different products and services, or whether it should be operating and marketing in a fundamentally different way.
Although strategies typically take considerable time to implement, and thus are generally long range in nature, the time span is not the principal focus of strategic planning. In fact, strategic planning, supported by the management of the strategy, compresses time. Competitive shifts that might take generations to evolve instead occur in a few short years. In a survey of senior executives, 80 percent indicated that the productive lives of there strategies were getting shorter and 75 percent believed that their leading competitor would be different within five years. Therefore, it is preferable to use "long range" and "short range" to describe the time it will take to accomplish a strategy rather than to indicate a type of planning.
Strategic Planning to Strategic Management
The 1960s and 1970s were decades of major growth for strategic planning in business organizations. Leading companies such as General Electric were not only engaged in strategic planning but also actively promoted its merits in the business press. The process provided these firms with a more systematic approach to managing business units and extended the planning and budgeting horizon beyond the traditional 12-month operating period. In addition, business managers learned that financial planning alone was not an adequate framework. In the 1980s the concept of strategic planning was broadened to strategic management. This evolution acknowledged not only the importance of the dynamics of the environment and that organizations may have to totally reinvent themselves but also that continuously managing and evaluating the strategy are keys to success. Thus, strategic management was established as an approach or philosophy for managing complex enterprises and, as discussed in Perspective 1-1, should not be viewed as a passing fad.
Strategic Management in the Health Care Industry
Strategic management concepts have been employed within health care organizations only in the past 25 to 30 years. Prior to this time, individual health care organizations had few incentives to employ strategic management because typically they were independent, freestanding, not-for-profit institutions, and health services reimbursement was on a cost-plus basis. In many respects health care has become a complex business using many of the same processes and much of the same language as the most sophisticated business corporations. Certainly, in the late 1980s and 1990s many health care organizations had much to learn from strategically managed businesses. As a result, many of the management methods adopted by health care organizations, both public and private, initially were developed in the business sector.
Although the values and practices of for-profit business enterprises in the private sector have been advocated as the appropriate model of managing health care organizations, a legitimate question arises concerning the appropriateness of the assumption that business practices may always be appropriate to the health care industry. Certainly, not all the "big ideas" have delivered what was promised, even in business. It has been pointed out that:
1. Some strategic alternatives available to non-health care organizations may not be realistic for many health care organizations.
2. Health care organizations have unique cultures that influence the style of and participation in strategic planning.
3. Health care has always been subject to considerable outside control, and
4. Society and its values place special demands on health care organizations.
However, strategic management, especially when customized to health care, does seem to provide the necessary processes for health care organizations to cope with the vast changes that have been occurring. Over time these business approaches increasingly have been modified to fit the unique aspects of health care organizations.