Strategic Decision Making: It’s Time for Healthcare Organizations to Get Serious

November 16, 2005

By Young, David W

“What’s the use of running if you are not on the right road?”

So says a German proverb, and it’s a question that healthcare organizations should be asking themselves. During the next two decades, they will confront a variety of new environmental and competitive demands requiring serious strategic thinking. For example, the leading edge of baby boomers is approaching age 60, suggesting that, without some significant changes in lifestyles, public health programs, or healthcare delivery patterns, inpatient costs will increase exponentially.



These new demands are occurring in a marketplace decidedly unlike those described in economics textbooks. There are four actors in this market: a consumer, who receives services from or at the behest of aprovider, whose fees are paid (or costs reimbursed) by a health plan or other insurer, who receives insurance premiums from an employer.

Each of the resulting “submarkets” has a different pricing unit. Moreover, in each submarket, the seller’s price will have an impact on the purchaser’s buying behavior, resulting in decisions that interact with other aspects of the healthcare system.

Some of these interactions have been known for decades. For example, 30 years ago, the introduction of a $1 copayment for California’s MediCal (indigent) patients led to a substantial reduction in their use of primary care. Unfortunately, some of these same patients were hospitalized several months later with conditions that could have been avoided had they received timely primary care. The result was an increase in total MediCal expenditures (see “Copayments for Ambulatory Care: Penny-Wise and Pound-Foolish,” by Milton Roemer, et al., inMedical Care, June 1975).

The mixture of environmental demands, market forces, and system interactions means that all healthcare organizations should be thinking more carefully about the challenges and opportunities they face, and couple that assessment with an analysis of their capacity to develop appropriate strategic responses.

SWOT Analysis: Perceived Versus Real

Strategy formulation frequently includes a SWOT analysis, or an assessment of internal strengths and weaknesses (SW) combined with environmental opportunities and threats (OT). However, a SWOT analysis rarely identifies real organizational strengths and weaknesses or real environmental opportunities and threats. Instead, senior managers act only onperceived strengths, weaknesses, opportunities, and threats as filtered through their own lenses and those of middle managers, physicians, nurses, and others in the organization. These filtered perspectives prevent senior management from seeing the real SWOT, thereby creating a potential for suboptimal strategic decisions.

There are four techniques that senior managers can use to close the gap between their perceived environment and the real one. In some industrial organizations, these techniques are essential aspects of the strategy formulation process; they can be equally valuable for a healthcare organization.


Generate conflict. Properly managed, conflict can provide considerable information about an organization’s environment. For example, a hospital concerned about the impact of a proposed musculoskeletal center on its overall operations might dedicate an afternoon or longer to a discussion among the leaders of several departments about ways the proposed center will affect matters such as operating room demand, nursing and other staffing needs, purchasing, transport, housekeeping logistics, and the like. A variety of contrasting views no doubt would arise and need to be resolved, all of which can contribute to a more successful implementation effort.

Encourage employees to question existing rules and assumptions. When a hospital includes a member of the housekeeping staff or a transport worker on a process redesign task force, the results can be both surprising and dramatic. In some hospitals, these lower- level workers have a deeper understanding than their superiors of the environment that affects their jobs, and can suggest effective ways to address those issues.

Develop a learning culture. An off-site workshop to discuss the difficulties one department encountered in developing and implementing a clinical pathway no doubt would be immensely useful to other departments faced with a similar task. For this to happen, the culture needs to encourage it, and the organization needs to institute a process for the sharing of problems, solutions, and other matters by which one department or program can learn from the experience of another.

Distinguish between available resources and patient needs. In one hospital where a study was under way to improve the efficiency of the admissions office, a member of the task force questioned whether the office was needed at all. After some weeks of study and analysis, the hospital decided to eliminate its admissions office entirely-it found that the admissions process could take place without the presence of an admissions office.

This experience suggests that hospitals need to think carefully about the mix of supportive services they provide to patients, their cost, and whether a less expensive approach could achieve the same results.

The Strategic Value of Trade-Offs

Once an organization believes it has a good understanding of its real strengths and weaknesses, and its real environmental threats and opportunities, it can formulate its strategy. In part, this strategy’s quality can be assessed in terms of trade-offs. That is, a high-quality strategy is one in which an organization has decided what it is not going to be as well as what it intends to be.

There are three broad trade-off dimensions: service or program variety, customer needs, and customer access. Two well-known industrial organizations are illustrative. Ikea, a company that sells unassembled furniture, focuses on many customer needs, but offers limited access and has a limited range of products. Jiffy Lube, by contrast, has made its trade-offs by focusing on broad access to some very limited services, meeting very few customer needs.

Most healthcare organizations have not made these sorts of trade- offs, preferring instead to attempt to be all things to all patients. Nothing could be more strategically misguided. To thrive in the 21st century, healthcare organizations should consider which services and programs they wish to emphasize, for which kinds of patients, and in which localities-and then eliminate programs and other activities that do not fit that focus.

Making strategic trade-offs does not require hospitals to become what Regina Herzlinger called “focused factories”-institutions offering only one service to many patients (Market-Driven Health Care, 1997). Shouldice Hospital, in Ontario, Canada, is an example. Its only service is hernia surgery. It draws patients from long distances for its cost-effective and high-quality care, and thus has become the epitome of the focused factory. By focusing on patients with particular disease conditions or characteristics, or on particular organs or surgical procedures, organizations such as M.D. Anderson Cancer Center, Cincinnati Children’s Hospital, Massachusetts Eye and Ear Infirmary, and New England Baptist Hospital have made similar trade-off decisions, although none quite as specific as Shouldice.

A Framework for Strategic Trade-Offs

Strategic trade-offs also can be assessed in terms of competitive scope (broad versus narrow) and pricing policy (low price versus premium price). The goal of organizations with a low-price strategy is to deliver a product of acceptable quality at a price below that of its competitors. By contrast, organizations with a premium-price strategy select narrow market segments with unusual needs, and offer products and/or services that are widely acknowledged as superior on at least one dimension. The distinction between Bic and Mont Blanc pens illustrates the contrast.

In addition to Shouldice Hospital, Mayo Clinic is an example of an organization that has made trade-offs along these two dimensions. Mayo focuses on patients (especially international patients) who are not constrained by insurance limits on payments, and it offers what most observers consider to be a superior, well-coordinated set of services.

Unfortunately, examples like this are difficult to find. Yet these sorts of trade-offs are essential for healthcare organizations that wish to ensure their long-term financial viability. Although some hospitals have moved slightly in this direction by offering supplemental services for which patients pay out of pocket, such as private rooms or gourmet meal service, most are stuck in the middle. They are constrained by third-party or governmental payment rates (which make them low-price providers), and yet they must contend with medical staffs that demand premium-priced resources.

As an example, some orthopedic surgeons, largely due to personal preference, use comparatively expensive joint replacement devices when less expensive devices would suffice. Some hospitals al\low physicians to admit their patients with little or no advance notice, even when the need for hospitalization is not urgent. One result is nursing coverage demands that require the use of expensive agency nurses. Other hospitals remain at low occupancy during weekends and holidays because physicians do not want to work during these time periods, or because potential patients wish to be at home with their families. Still others succumb to physician demands for cutting- edge technology when less expensive technology would do an acceptable job without compromising quality.

Assessing the Quality of an Organization’s Strategy

Three criteria can be used to assess a strategy’s quality. First, it must be consistent with the factors that are critical to success in the organization’s environment. These factors will differ from one state to the next, depending on a variety of legal and payment requirements and constraints. There also will be different factors for different hospitals in a given state. Certainly, the environment of a large urban teaching hospital in New York is considerably different from that of a small rural community hospital in the Finger Lakes region.

Second, the organization’s strategy must be capable of adapting to unanticipated circumstances or changes in its environment. Here, an organization must tread carefully between being capricious and whimsical, on the one hand, and rigid despite overwhelming evidence of a need for change, on the other. For example, despite overwhelming evidence of an aging population and the demands those patients will bring, many hospitals have not even begun to invest in geriatric programs or other infrastructure needed to care for the elderly. Denying the imminent impact of this demographic “bubble” portends the same sort of calamity that befell Polaroid and Kodak when they denied the impending effect of digital photography.

Finally, and most important, the strategy must be accompanied by a robust and internally consistent set of operational activities. An “activity set” should not only fit with the organization’s critical success factors, but also be difficult for competitors to imitate. This combination assists the organization to sustain its programs and services against competitors’ efforts to capture some of its market share.

Creating an Activity Set

An activity set comprises those structures, systems, and processes that are consistent with the organization’s strategy and that assist it to attain superior performance. An activity set includes operational policies and procedures, information systems, incentive and reward systems, conflict management processes, lines of authority, capital budgeting activities, and operational budgeting and reporting systems.

Although it may be possible to copy one or a few elements of an organization’s activity set, a good activity set is so tightly linked that it is all but impossible to copy all of it. As Michael Porter discussed in his now-classic article “What is Strategy?” (Harvard Business Review, November-December, 1996), an airline wishing to compete with Southwest Airlines would need an activity set that included limited baggage handling; use of secondary airports; a fleet of identical aircraft; and an absence of first- class travel, meal service, and assigned seats.

Without the entire collection of activities for all of its flights, an airline cannot achieve the rapid gate turnaround time that allows Southwest to keep its planes in the air more of the time than its competitors and hence use fewer aircraft for the same number of passenger miles. Southwest’s industry-beating return on assets is due in no small way to its need for fewer fixed assets (airplanes) per dollar of revenue than its competitors.

It would appear that many hospitals could make better strategic trade-offs than they have to date by recognizing that their pricing policy reflects a low-price strategy, and therefore, like Southwest, they need to design an activity set that is appropriate for a low- cost organization. Imagine the competitive advantage that a hospital could have, for example, if it:

* Linked its strategy of low-cost inpatient care services with an activity set comprising a capital budgeting process that ensured investments in assets that lowered operating costs, rather than increasing the supply of cutting-edge technology

* Used operational budgeting and procurement processes that ensured the use of standardized surgical devices

* Had an information system that included an electronic medical record permitting the rapid retrieval of diagnostic and treatment information

* Instituted an operating policy that required nonurgent care admissions to be scheduled several weeks in advance

* Adopted a policy that required patients scheduled for orthopedic surgery to begin their rehabilitation care several weeks prior to admission so as to shorten their lengths of stay

* Implemented a home care program that minimized the number of readmissions following earlier-than- average discharges

The Future

Many healthcare organizations have used their not-for-profit status and the importance of their missions as excuses to avoid making difficult strategic trade-offs. Indeed, some of them have even been highly critical of organizations that have made such trade- offs. For-profit hospitals that are selective in the patients they serve, or entities such as cosmetic surgery centers, boutique physician practices, freestanding dialysis clinics, and the like, all have been looked on with disdain. Yet the essence of strategy rests in these sorts of trade-offs.

Strategic trade-offs do not need to be mercenary, however. Nor do they imply lower-quality care or compromising the not-for-profit mission. Rather, they address the reality that no organization can be all things to all people. In short, by thinking more creatively in the future than they have in the past, healthcare organizations can begin to make the sorts of trade-offs that will allow them to choose a strategic position. They then can design an activity set to support that position-one that will allow them to be financially viable while simultaneously achieving and sustaining superior programmatic performance.


* To get serious about its strategic decision making, a healthcare organization needs to know what it does not intend to be.

* Organizations make trade-offs along three dimensions: service or program variety, customer needs, and customer access.

* Strategic trade-offs also should be assessed in terms of competitive scope and pricing policy.

“If you don’t know where you are going, any road will get you there.”

-attributed to Lewis Carroll, British author

The patient is a 48-year-old male presenting with atypical chest pain, positive smoking and family history, and normal EKG. A review of an alternative emergency department treatment approach showed this hospital that by avoiding unneeded resources (an inpatient admission in this case), it could achieve the desired result (the effective treatment of a patient) at a much lower cost. At an incidence rate of 5/1,000, the purchaser would save $3.5 million annually.

These Healthcare organizations have made tradeoffs along the dimensions of competitive scope and pricing policy. Relatively few healthcare organizations have made comparable trade-offs.

“There is a slightly odd notion in business today that things are moving so fast that strategy becomes an obsolete idea. This is a mistake. If you do not develop a strategy of your own, you become part of someone else’s strategy.”

-Alvin Toffler, American writer and futurist

“Strategy is about setting yourself apart from the competition. It’s not a matter of being better at what you do-it’s a matter of being different at what you do.”

-Michael E. Porter, PhD, professor, Harvard Business School

About the author

David W. Young, DBA, is professor of management, Healthcare Management Program, Boston University School of Management, Boston, and a principal in The Crimson Group, Inc. (www.davidyoung.org).

Copyright Healthcare Financial Management Association Nov 2005

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