September 30, 2023

Why the Nature of Strategic Management Is Important

Chapter 1 The Nature of Strategic Management

Charles Darwin’s quote speaks to a core concept of strategic management – responsiveness to change. For organizations in a world where there is no change, strategic management is unnecessary; however, for organizations in an ever- changing world, strategic management is essential. Similar to biology, the organi- zation that best adapts to the demands of its environment prospers and those organizations that do not adapt become less and less relevant. Staying relevant is the key to success. The rate of technological, social, economic, competitive, and political change impacting organizations continues to accelerate. Although change affects all industries, nowhere has greater change occurred than in the

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

—ChArleS DArwin, BriTiSh nATurAliST

Ginter, Peter M., et al. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/franklin-ebooks/detail.action?docID=5228460. Created from franklin-ebooks on 2023-09-29 01:05:16.

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health care sector. Strategic management enables leaders to make sense of change and develop strategies to position organizations for success in the continuously evolving health care environment.

More than simply being responsive to change, strategic management attempts to create the future by envisioning what could be and charting a course toward that dream. in addition to the processes underlying the pursuit of the dream, strategic management provides the organization with structured thinking and practices for translating dreams into effective visions, missions, strategies, and plans that will move organizations toward their aspirations. Dreams, without the enabling strategic management processes and direction, are just fantasies; with the structure provided by strategic management, dreams can become reality.

Strategic management is leadership – responding to change, setting direction, and focusing the organization’s momentum. Strategic management is the clearest manifestation of leadership in organizations. As a result, virtually all successful health care organizations have embraced strategic management to cope with change and translate their visions, missions, and strategic goals into actuality. learning about strategic management also means learning about leadership – the ability to utilize strategic thinking, strategic planning, and strategic momentum in organizations.

use concepts in this chapter to remain relevant!

learning objectives

After completing the chapter you will be able to: 1. Describe why strategic management is crucial in today’s dynamic health care

environment. 2. Trace the evolution of strategic management. 3. Discuss the rationale and usefulness of strategic thinking maps. 4. Define and differentiate between strategic management, strategic thinking,

strategic planning, and strategic momentum. 5. Articulate the necessity for both the analytic and emergent models of strategic

management. 6. Clarify whether an organization may realize a strategy that it never intended. 7. Discuss the benefits of strategic management for health care organizations. 8. Explain the links between the different levels of strategy within an organization. 9. Describe the various leadership roles of strategic managers.

Strategic Management Competency After completing this chapter you will be able to create a process for developing a strategic plan for a health care organization.

Chapter 1 the Nature of StrategiC MaNageMeNt 3

Managing in a Dynamic Industry

A major aspect of strategic management concerns responsiveness to change to remain relevant. Significant change in the health care system 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. Furthermore, a multitude of interests are directly or indirectly involved in the delivery of health care. For instance, the for-profit provider segment has grown dramatically; private-sector businesses are largely responsible for the develop- ment and delivery of drugs, medical supplies, and many technical innovations, and government agencies regulate much of the actual delivery of and payment for health care services. Certainly, health care systems, 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, health care organiza- tions must be responsive to change and effectively manage that change in this dynamic industry.

The Nature of Health Care Change The health care system has experienced considerable change and will undoubt- edly contend with even more intensive transformations in the future. interviews with health care professionals and a review of the health care literature suggest that the types and magnitude of change for which health care organizations will have to be responsive include some or all of the following areas: legislative/ political, economic, social/demographic, technological, and competitive.1 A few illustrations are provided below.

Economic Changes ● Continued growth in the industry – health care by most measures is the

largest u.S. industry and non-government employer.2

● Procedure costs may be falling while total spending is rising.3

● employers will become increasingly unwilling to shoulder the burden of the costs of health care for their employees and retirees.

● Over 27.3 million Americans were without health insurance in 2016. however, the uninsured rate dropped to 8.6 percent, which is the first time in recent history the rate has dropped below 9 percent.

Social/Demographic Changes ● without a truly radical reduction in health care spending, which there is no

reason to expect, demographics alone will drive health care’s share of GDP (gross domestic product) as high as 25 percent.4

● The 2010 Affordable Care Act (ACA) resulted in 20 million people gain- ing health insurance coverage – continuing evolution of health care leg- islation will no doubt further affect the number of people with health insurance.

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● An aging population and increased average life span will place capacity burdens on some health care organizations while a lessening of demand threatens the survival of others. By 2020, the u.S. population over the age of 65 is expected to increase from 47.5 million to 53.7 million or approxi- mately 20 percent of the u.S. population.

● The u.S. population will become increasingly diverse. ● The hispanic population will continue to grow; some experience dif-

ficulty with health literacy. hispanics have become the largest minority group, representing about 18 percent of the u.S. population. By 2050, it is estimated that as many as one out of every four Americans will be hispanic.

Legislative/Political Changes ● legislative changes in health care regulation will become the “new normal”

in conjunction with changes in government administrations as policy mak- ers try to balance costs and issues related to health care access.

● The most significant external factor affecting health care may be how it is financed. See essentials for a Strategic Thinker 1–1, “what is Private health insurance?” and essentials for a Strategic Thinker 2–1, “what is Government health Care insurance?” to understand why the health care insurance market is so important for this industry.

● employer-based insurance may diminish as the penalties for not providing insurance for employees are eliminated or are significantly less than the cost of health insurance; more employees will likely shift to government sponsored policies.

Technological Changes ● Further growth in the adoption of electronic health records (ehrs)

will produce more data to improve the quality of care, that will be used to determine payments for hospitals and physicians (value-based payment).

● Significant advances in medical information technology are anticipated, such as automation of basic business processes, clinical information inter- faces, data analysis, and telehealth.

● new technologies will emerge in the areas of drug design, imaging, mini- mally invasive surgery, genetic mapping and testing, gene therapy, vac- cines, artificial blood, and xenotransplantation (transplantation of tissues and organs from animals into humans).

Competitive Changes ● The disintegration of some health care networks can be expected. in 2016

Aetna and united health, two of the largest u.S. insurance companies, announced they could not sustain the losses and were significantly reduc- ing their participation in government health care exchanges.

Chapter 1 the Nature of StrategiC MaNageMeNt 5

ESSENTIalS for a STraTEgIC THINkEr 1–1

What is Private Health insurance?

Private health insurance buys health care cover- age offered by commercial and non-profit organ- izations that requires enrollment (membership) and premiums (fees) usually paid monthly to cover some or all costs of care. According to the U.S. Census Bureau, over 214 million people had private health insurance in the United States at some time during 20151 – representing two- thirds of the population and over four times the number of people that have Medicare coverage.

Private coverage is offered in three market segments: the large-group, small-group, and individually-purchased markets. The distinc- tion between large and small groups varies but is often defined as having more or less than 500 covered lives; most such groups are employer-based.

Virtually all private health plans are either health maintenance organizations (HMOs) or preferred provider organizations (PPOs). HMOs typically have a relatively narrow set of hospital and physician providers who are contracted to provide health services for enrollees. PPOs typically offer a broader panel of providers, but some of these will require higher cost sharing on the part of enrollees. HMOs usually bear under- writing risk (a guarantee made by an insurer that will pay for losses incurred), while PPOs often do not. Increasingly many private plans are high- deductible health plans; lower premiums are

offered for these PPO or HMO insurance plans that require that the first few thousands of dol- lars of health care costs be paid by the enrollee before insurer coverage begins.

In the large-group market virtually all employers offer health insurance to employees and their dependents, often sponsoring two or more plans. In this market segment the PPOs offered are almost always self-insured (mean- ing that the employer is effectively its own insurer). It pays an administrative-services-only fee to a traditional insurer or a third party to manage the plan; however, the actual medi- cal claims are paid from the employer’s funds. The HMOs offered are usually simple insurance products offered by insurers and paid for by premiums.

The small-group market is more diverse. Only about half of firms with three to nine employees offer coverage and about 70 percent of those with 10 to 24 employees offer coverage. Nearly all firms with more than 50 employees offer cov- erage, and did so even prior to the Affordable Care Act’s employer mandate. Most of these employers offer a single health plan that is purchased from a traditional insurer; however, around 30 percent of the larger small employers (more than 100 workers) are self-insured.

The individually-purchased market segment is much smaller, covering only 18 to 24 million

● A changing role for public health is expected, moving back to “core” activi- ties (prevention, surveillance, disease control, assurance) and away from the delivery of primary care.

● According to the Bureau of labor Statistics, more than 1.2 million vacancies will exist for registered nurses (the largest segment of the health care work- force) through 2022.

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people. Individuals and families buy coverage from an insurer licensed by their state. This seg- ment tends to be dominated by a single insurer in most states although multiple insurers often offer coverage. This market segment has been most affected by the ACA. The law established Health Insurance Marketplaces or exchanges through which people may buy coverage, although they may buy coverage through an agent or directly from an insurer. The exchanges, however, provide access to subsidies for coverage. Prior to the ACA, premiums in this market segment were often determined, in part, by the health status of the

applicant; the ACA precluded the use of pre- existing conditions to set premiums.

RefeRence

1. J. C. Barnett and M. S. Vornovitsky, Current

Population Reports, P60–257(RV), Health

Insurance Coverage in the United States: 2015

(Washington, DC: U.S. Government Printing

Office, 2016).

Source: Michael A. Morrisey, PhD, Professor and Head, Department

of Health Policy & Management, School of Public Health, and

Adjunct Professor, Bush School of Government & Public Service,

Texas A&M University.

Coping with Change

how can leaders of health care organizations deal with the diversity and mag- nitude of change anticipated in the industry? which issues are most important or most pressing? Furthermore, what new issues will emerge? undoubtedly, issues that have yet to be identified or fully assessed will arise. Surviving rapid, complex, and often discontinuous change requires strong leadership. Successful health care organizations have leaders who understand the nature and implica- tions of external change, possess the ability to develop effective strategies to navigate change, and have the will as well as the ability to actively manage the momentum of the organization. These activities are collectively referred to as “strategic management.” More specifically, strategic management is the process of strategic thinking, strategic planning, and managing the strategic momentum of an organization to provide direction and achieve the organization’s mission and vision. Strategic management is essential for leading organizations in dynamic industries.

Organizational change is a fundamental part of success. As health care lead- ers 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 tak- ing place in their industry; they should not simply be responsive to them, they must envision and create the future. health care leaders must be prospective, construct new visions for success, and be prepared to make significant improve- ments. Such preparation may include educating staff concerning the necessity for change. For example, the Jersey City Medical Center in Jersey City recognized that moving from a paper system to electronic records would require helping doctors understand the value of an ehr and assuring them that education and individual mentoring would be available to assist in the implementation.5

Chapter 1 the Nature of StrategiC MaNageMeNt 7

This chapter provides a practical model for dealing with change, transforming an assessment of the implications of that change into a workable plan, and managing the plan. Coping with change requires leadership as well as careful management. Therefore, the chapter examines the role of leadership and its relation to strategic management. in addition, the foundations and evolution of strategic management provide an excellent underpinning for understanding its nature and function.

The foundations of Strategic Management

A strategy is a consistent, relatively enduring approach to achieve a goal or objec- tive; a type of plan that provides a set of guidelines or a line of attack for an organization to move from where it is today to a desired state sometime in the future. in political and military contexts, the concept of strategy has a long his- tory. 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 strate -go -s, meaning “a general,” which in turn comes from roots meaning “army” and “lead.”6 The Greek verb strate -go – means “to plan the destruction of one’s enemies through effective use of resources.”7 Similarly, many of the terms commonly used in relation to strategy – objectives, strategy, mission, strengths, and weaknesses – were developed by the military.

long-range Planning to Strategic Planning The development of strategic management began with much of the business sec- tor adopting long-range planning. Long-range planning forecasts demand for cur- rent products/services to enable managers to develop marketing and distribution, production, human resources, and financial plans, thereby matching production capacity to demand. long-range planning was 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 distri- bution, production, human resources, and financial plans for their growing organ- izations. 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 requirements, capital alloca- tions, and other operational growth needs.

As industries became more volatile, long-range planning was replaced by stra- tegic planning because the assumption underlying long-range planning – that the organization will continue to produce its present products and services – was not necessarily valid. in contrast, 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 in a fundamentally different way.

8 STraTegic MaNageMeNT of HealTH care orgaNizaTioNS

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.8 in a survey of senior executives, 80 percent indicated that the productive lives of their strategies were getting shorter and 75 percent believed that their leading competitor would be different within five years.9 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 budget- ing horizon beyond the traditional 12-month operating period. in addition, business managers learned that financial planning alone was not an adequate framework.10 in the 1980s the concept of strategic planning was broadened to strategic management. This evolution acknowledged not only the impor- tance of the dynamics of industries 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 essentials for a Strategic Thinker 1–2, “what are These?”, should not be viewed as a passing fad.

ESSENTIalS for a STraTEgIC THINkEr 1–2

What are These?

“Management fads” is usually the flippant answer. However, each of these management approaches was a genuine attempt to change and improve the organization – to focus efforts, to improve the quality of the products and services, to improve employee morale, to do more with less, to put meaning into work, and so on. Some of the approaches worked better than others; some stood the test of time and others did not. Yet, it would be too harsh to simply dismiss them as fads

or techniques. The goals for all of these manage- ment approaches were to manage and shape the organization – to make it better and move it toward excellence. One thing that has distinguished all of these “fads” is the enthusiasm and commit- ment they have engendered among managers and workers. For many, these approaches have significantly increased the meaning of work – no small accomplishment in an era in which people are increasingly hungry for purpose.1 A definition

Chapter 1 the Nature of StrategiC MaNageMeNt 9

for each of these management approaches may be found in Resource 4 – Glossary of Strategic Management Terms at the end of this textbook.

1950s

● Theories X and Y ● Management by Objectives ● Quantitative Management ● Diversification

1960s

● Managerial Grid ● T-Groups ● Matrix Management ● Conglomeration ● Centralization/

Decentralization

1970s

● Zero-Based Budgets ● Participative Management ● Portfolio Management ● Quantitative MBAs

1980s

● Theory Z ● One-Minute Managing ● Organization Culture ● Intrapreneuring ● Downsizing ● MBWA (Management by

Wandering Around) ● TQM/CQI

1990s

● Customer Focus ● Quality Improvement ● Re-engineering ● Benchmarking ● Resource-Based View

2000s

● Six Sigma ● Balanced Score Card ● Transformational Leadership ● Self-Managed Teams ● Dynamic Capabilities ● Virtual Organizations ● Blue Oceans ● The Learning Organization

2010s

● Knowledge Management ● LEAN Six Sigma ● Strategic Mapping ● Black Swan ● Disruptive Innovation ● Predictable Surprises ● Big Data Analytics

When management approaches such as these fail, it is usually because they become ends

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Why the Nature of Strategic Management Is Important

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