Porter's generic strategies, discontinuous environments, and performance: a longitudinal study of changing strategies in the hospital industry

Health Services Research, Dec, 1993 by Bruce T. Lamont, Dan Marlin, James J. Hoffman

The concept of "fit" is a central thrust for middle-range theories in many management disciplines. In this context, "fit" refers to how variables, such as an organization's strategy and its environment, combine or match together to affect organizational performance. In the health care management literature the relationships between strategy and environment have received much attention in terms of ways in which they combine to affect hospital performance.

Currently, theoretical tension exists relating to the notion of equally viable, generic strategies versus the idea of particularly appropriate strategy-environment combinations (Zajac and Shortell 1989). On the one hand, traditional contingency theory suggests the existence of appropriate strategy-environment combinations (Burns and Stalker 1961; Dess and Beard 1984; Hambrick 1983, 1985; Kim and Lim 1988; Miller 1988; Miller and Friesen 1984). On the other hand, generic strategy typologies (Porter 1980; Miles and Snow 1978) have generally assumed that the various strategies are alternative, viable approaches across different environments. At the heart of the tension is whether organizational adaptation is environmentally determined or strategically determined (Astley and Van de Ven 1983). If organizational adaptation is environmentally determined, then firms with appropriate strategy-environment combinations will exhibit higher performance. Conversely, if organizational adaptation is strategically determined, then there may be alternative strategy-environment combinations with an equal probability of success.

While the static notion of an appropriate strategy-environment fit has received considerable attention in the management literature, the issue of changes in generic strategies in response to discontinuous environments has been relatively ignored (Zajac and Shortell 1989 is an exception). In this context discontinuous environmental change is considered to be environmental change so dramatic that many of the rules driving the strategic behavior of firms and governing the industry cease to continue. Events in the environment that could cause discontinuous environmental change include major technological breakthroughs, major changes in the laws and regulations that govern an industry deregulation of the airline industry would be one example of this), a sudden change in the economy such as the stock market crash before the Great Depression, new sources of competition, or any combination of these events.

The impact of discontinuous environmental change on strategy and performance is an important area of study, since discontinuous change can restructure an industry and change the bases of competition (Meyer, Brooks, and Goes 1990) resulting in inappropriate strategy-environment combinations for some firms. This has been the case in the hospital industry where dramatic changes swept through it during the middle 1980s, changing it from a high-growth, noncompetitive industry to a low-growth, highly competitive one, (Cisneros 1986; Zajac and Shortell 1989). These industry changes, precipitated by the introduction of the Medicare prospective payment system (PPS) between 1983 and 1986, altered long-standing relationships between hospitals, physicians, patients and insurers (Meyer, Brooks, and Goes 1990). During this same time period, the emergence of new technologies, changing consumer expectations, and new sources of competition also contributed to the hospital industry's environment becoming discontinuous in nature.

This study examines whether or not Porter's 1980) typology of differentiation, cost leadership, and muddling strategies is equally viable in the hospital industry and if hospitals with appropriate strategy-environment combinations exhibit higher performance than other hospitals. Based on an environmentally determined view of organizational adaptation, we argue that the success of strategy types varies across different environments and that changes in generic strategies in response to a discontinuous environment will be associated with changes in performance. Specifically, we assert that (1) hospitals with a proper strategy-environment fit will outperform hospitals without a proper strategy-environment fit; (2) hospitals whose strategic response is toward a proper strategy-environment fit will exhibit an increase in performance; and (3) hospitals whose strategic response is away from a proper strategy-environment fit will show a decrease in performance.

FRAMEWORK OF ANALYSIS

GENERIC STRATEGIES AND

PERFORMANCE

Porter (1980) suggested that certain generic strategic approaches can be used by firms to outperform other organizations in an industry. One generic strategy is to achieve overall cost leadership in an industry by devoting considerable effort to cost control so that above average returns can be obtained even with low prices. Another generic strategy is for an organization to differentiate its product or service offering in order to create something that is perceived industrywide as being unique. Approaches to differentiation may rest on breadth of product or service offerings, technology, special features, of customer service. Organization with no coherent strategy are considered 'stuck in the middle," pursuing a muddling strategy.