Helpful or harmful? The impact of strategic change on the performance of U.S. urban hospitals

Health Services Research, Feb, 2002 by Hanh Q. Trinh, Stephen J. O'Connor

Strategic management provides a framework for guiding the management of all types of contemporary organizations. Over the past 2 decades, the concepts of strategic management have been increasingly applied within the health care industry. Strategic management has been embraced by health care organizations as an integral part of leadership and as a way to anticipate and cope with a variety of external forces (Ginter, Swayne, and Duncan 1998). The primary purpose of strategic management is to ensure a fit between an organization's external environment and its internal situation. To ensure compatibility and survival, organizations must be able to comprehend those significant environmental shifts taking place around them and to equip strategically their organizations to succeed in the new environment. Zajac, Kraatz, and Bresser (2000) noted that although the notion of fit indicates "a match at a single point in time, understanding dynamic fit requires that any new perspective on strategic fit must come to grips w ith the question of strategic change" (p. 429).

The debate continues as to whether strategic change helps or harms organizations (Barnett and Carroll 1995). On the one hand, organizational adaptation theorists suggest that intentional strategic change helps organizations adjust to environmental conditions, prepare for the future, reduce external dependence, and improve overall coordination for better performance (Galbraith 1977). Without strategic change, organizations might perish, unable to reposition themselves in a new environment. On the other hand, population ecology theorists argue there are costs associated with strategic change because it draws resources from an organization, interrupts its operations, and tampers with its legitimacy, so the change itself can be harmful (Hannan and Freeman 1989). In addition, implementing the change involves enormous risk and usually is met with resistance. Organizational inertia is one cause of this resistance, and it serves to limit organizational adaptive flexibility.

Surprisingly, the link between strategic change and organizational performance has not been the subject of much attention among health services researchers. Previous studies have tended to focus on whether hospitals change their strategies in response to environmental shifts (Ginn 1990; Ginn and Young 1992; Kralewski, Wingert, Felman, et al. 1992; Trinh 1999; Trinh and O'Connor 2000). Others have attempted to identify relationships between strategies and organizational performance (Moscovice 1989; Shortell 1988; Smith, Piland, and Funk 1992) or between strategies and financial performance (Cleverley and Harvey 1992a, 1992b). More recent studies have focused on the influence of environmental and organizational characteristics on organizational performance (McCue, Clement, and Hoerger 1993). Only one has examined the implications of changing strategies on performance (Zajac and Shortell 1989).

Researchers, managers, and policy makers frequently call for hospitals to adapt to meet the needs of dynamic environments, but they rarely examine the performance implications of such exhortations. For example, policy makers may wish to know whether reimbursement policies meant to improve care efficiencies might create other inefficiencies within hospitals. Although strategic change is viewed as a key to success and likely to improve long-term financial performance, managers may question whether a particular change merits the cost if it draws limited resources away from other uses.

FRAMEWORK OF THE ANALYSIS

In order to determine the extent to which strategic change contributes to the success of urban hospitals, this study is based on the general model shown in Figure 1 and targets the following three main research questions:

(1) How do environmental (including managed care market penetration) and organizational characteristics influence the degree of changes in urban hospitals' strategies to enhance HMO business and contain costs?

(2) To what extent are managed care market, environmental, and organizational characteristics associated with urban hospital performance?

(3) Which strategies--HMO business enhancement or cost containment--are helpful or harmful in terms of exerting an influence on urban hospital performance?

The principal idea behind strategic management is that organizations confront environmental changes by selecting and executing proper strategies. Accordingly, those able to cope successfully engage in strategic adaptation, the process whereby organizations choose new sets of core strategies to position them better for future viability (Shortell, Morrison, and Friedman 1990) by conforming to stipulations imposed by the environment. Environmental and organizational characteristics can have a strong impact on the ability to adapt strategically as well as on organizational performance. For example, population density and per capita income represent environmental resources that can sustain organizations (Mick, Morlock, Salkever, et al. 1994). Furthermore, although some studies indicate competition induces hospitals to lower their costs and to be more price competitive (Zwanziger and Melnick 1996), others suggest the opposite (Gruber 1994).