6 Developing Strategic and Operational PlansIngram Publish

6 Developing Strategic and Operational Plans
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To mean well is nothing without to do well.
—Plautus
Trinummus
Learning Objectives
After reading this chapter, you should be able to do the
following:
• Identify strategy concepts, including the components of
organizational strategy; generic strategies; diversi-
fication, integration, and implementation strategies; and blue
ocean strategy.
• Describe the use of strategies for large, multiunit
organizations, including the use of the Boston Consult-
ing Group matrix to discern strategic implications from the
analysis of existing operations, and the use of
product/market expansion strategies and diversification
strategies for organizational growth.
• Discuss tactical issues that are relevant to pursuing
participation in a managed-care network.
• Delineate the factors that influence the selection of a
strategy by an organization.

• Explain how operational plans support strategic plans, and
describe how operational plans are developed.
Section 6.1Strategy Concepts
Introduction
After developing a set of objectives for the time period covered
by the strategic plan, the strat-
egy necessary for accomplishing those objectives must be
formulated. First, planners must
design an overall strategy, and then define the operating details
of that strategy as it relates
to providing services, promoting operations, determining
locations, and increasing revenue
sources. This chapter introduces the concept of strategy, and
describes strategy elements,
approaches to strategy development, and how operational plans
support strategic plans.
6.1 Strategy Concepts
The word strategy has been used in a number of ways over the
years and especially so in
the context of business. As we discussed in Chapter 2, strategy
means leadership and may
be defined as the course of action taken by an organization to
achieve its objectives. It is a
description first in general terms and then, in increasingly
greater detail, of the activities
the organization will undertake to meet its goals and fulfill its
ongoing mission. Strategy
is the catalyst or dynamic element of managing that enables a
company to accomplish its
objectives.

Strategy development is both a science and an art, a product of
both logic and creativity. The
scientific aspect deals with assembling and allocating the
resources necessary to achieve
an organization’s objectives with emphasis on matching
organizational strengths with envi-
ronmental opportunities, while working within cost and time
constraints. The art of strat-
egy is mainly concerned with the effective use of resources,
including motivating people to
make the strategy work, while being sensitive to the
environmental forces that may affect
the organization’s performance and maintaining the ability to
adapt the HCO to these chang-
ing conditions.
Components of Organizational Strategy
The focus of strategy varies by the planning level: the
organization as a whole or a unit within
the organization. However, we can identify five components of
strategy that define strategy at
each level. The following list provides descriptions of these five
components.
1. Scope. The scope of an organization refers to the breadth of
its strategic domain—
the number and types of locations, services offered, and market
segments it com-
petes in or plans to enter. Decisions about an organization’s
strategic scope should
reflect management’s view of the firm’s vision, mission, and
value discipline. This
common thread among its various activities and product/markets
defines the essen-
tial nature of what its business is, what it should be, and how it
contributes value to

its customers.
2. Goals and objectives. Strategies should detail the desired
levels of accomplish-
ment for one or more dimensions of performance —such as
volume growth,
profit contribution, return on investment, and customer
satisfaction—over
specified time periods for each of those service areas and for
the organization as
a whole.
3. Resource deployments. Every organization has limited
financial and human
resources. Formulating a strategy also involves deciding how
those resources
are to be obtained and allocated—across locations, services
offered, market seg-
ments, functional departments, and activities within each
business or product/
market.
4. Identification of a sustainable competitive advantage. The
heart of any strategy is a
specification of how the organization will compete in each
service arena and prod-
uct/market within its domain. How can it position itself to
develop and sustain a
competitive advantage over current and potential competitors?
To answer such
questions, managers must examine the market opportunities in
each unit and prod-

uct/market and the company’s distinctive competencies or
strengths relative to its
competitors (that is, its differential advantage). Real
competitive advantages exist
only when all four qualifying conditions are met.
5. Synergy. Synergy exists when the organizational units,
product/markets, resource
deployments, and competencies complement and reinforce one
another. Synergy
enables the total performance of the related businesses to be
greater than it would
otherwise be: the whole becomes greater than the sum of its
parts.
Generic Strategies
Strategy options are the alternative courses of action evaluated
by management before a com-
mitment is made to a specific course of action, which is
eventually outlined in the strategic
plan. Thus, strategy is the link between objectives and results.
Designing strategies is a pro-
cess that involves (a) identifying strategic options, (b) assessing
options, and (c) selecting the
most appropriate strategy or strategies (“1993—A boom year,”
1993). Most companies have
growth as one of the basic objectives, so one area of strategy
development revolves around
the question of how growth will be obtained.
For the most part, an HCO can use one of the following four
basic, or generic, strate-
gies to accomplish its objectives. The two primary strategies are
broad differentiation
strategy and focused differentiation strategy. However, with
pressures from payers

and competitors now forcing an increased emphasis on cost
containment in the deliv-
ery of health services, overall low-cost strategy has also become
a basic and necessary
competitive strategy that applies to overall cost leadership. A
fourth generic strategy is
focused low-cost strategy, which is a low-cost strategy that
focuses on cost leadership for
a particular service or segment. In any case, the strategy
selected must be an outgrowth
of the organization’s basic vision and mission. The four
different generic strategies are
depicted in Figure 6.1.
Figure 6.1: Generic HCO strategies
Any of these four generic strategies, whether broad or focused,
can be used to accomplish objectives and
achieve results.
f06.01_MHA 626.ai
Value creation
emphasizing lowering
cost
P
re
se
n

ce
i
n
a
li
m
it
e
d
n
u
m
b
e
r
o
f
m
a
rk
e
t
se
g

m
e
n
ts
P
re
se
n
ce
i
n
a
b
ro
a
d
r
a
n
g
e
o
f
m

a
rk
e
t
se
g
m
e
n
ts
Value creation
emphasizing unique
differentiating features
Type of competitive advantage pursued
M
a
rk
e
t
co
v
e
ra
g

e
Overall
low-cost
strategy
Focused
low-cost
strategy
Broad
differentiation
strategy
Focused
differentiation
strategy
Source: Adapted from Gamble, J. E., and Thompson, A. A. Jr.,
Essentials of Strategic Management: The Quest for
Competitive Advantage, McGraw-Hill-Irwin, 2009, p. 36.
Broad Differentiation Strategy
This strategy differentiates an HCO from other HCOs. An HCO
that pursues this strategy sees
that an important aspect of being able to fulfill its mission
involves cultivating the perception
of uniqueness in the minds of its service recipients and sponsors
regarding the HCO’s services
or products. In a sense, this means building brand loyalty so
that when patients or potential
patients think of a certain service, their first thought is of that
HCO.

For many HCOs, the broad differentiation strategy takes the
form of several distinct services,
each targeted to meet specific needs of patient groups in the
HCO’s service area. For example,
a medical group practice specializing in orthopedic services
could consider expanding the
number of programs it offers.
This medical group practice might seek to set itself apart from
its peers in the eyes of patients
by offering natural extensions of its current operations. Physical
therapy, outpatient rehabili-
tative medicine, or sports medicine services could be added to
the practice as part of a con-
tinuum of services for its patients. The patients would benefit
from the close coordination of
services and the convenience of multiple services, under one
roof. The medical group practice
would benefit from several additional sources of revenue.
By developing a reputation for high quality in programs such as
these, an HCO can come to
be associated in a positive way with certain types of needs for a
broad cross section of the
community. Becoming synonymous with quality services in the
public’s mind can enhance
the diversity and intensity of sources of revenue generation. The
end result of such differen-
tiation is a greater capability to fulfill the HCO’s mission
mandate in terms of its patient and
client needs.

For example, by using survey results to identify what was
important to its patients, Cleve-
land Clinic improved areas such as room cleanliness, the
medical staff ’s communication with
patients, and even the hospital’s noise level at night. These
differentiating factors improved
the hospital’s overall satisfaction rating from the 55th
percentile to the 92nd percentile for all
major hospitals in the United States in just four years (Merlino
& Raman, 2013).
Focused Differentiation Strategy
An HCO can also pursue its objectives by using a focused
differentiation strategy. This strategy
concentrates on a single service or a category of very similar
services offered by an HCO that
meets the needs of a specific group of patients/clients but still
seeks to differentiate the HCO
from its competition.
The Recreation Center for the Physically Limited employs a
focused differentiation strategy.
This center’s services are highly specialized: providing
recreational activities as a means of
enhancing the growth and well-being of its clients.
This center’s service recipients are tightly defined as well.
Recreational opportunities are
provided for the physically handicapped, excluding children
under the age of five. Using a
focused differentiation strategy, the recreation center seeks to
fill a service gap for the physi-
cally challenged in its community.
The main advantages of a focused differentiation strategy

include (a) capitalizing on the dis-
tinctive competencies of the people involved and (b)
concentrating on doing one thing well.
These advantages can also create a knowledge base of how to
carry out certain types of pro-
grams and improve efficiency in performing the services. An
example of a focused differentia-
tion strategy is in-home pharmaceutical services offered to non-
mobile patients. The chosen
segment must be big enough to justify the investment and
operating costs for serving the
segment. For for-profit organizations, it must also be a
profitable segment to serve.
Low-Cost Leadership Strategy
Another fundamental method for achieving objectives is a low -
cost leadership strategy,
which can involve either an overall low-cost strategy or a
focused low-cost strategy. The
hallmark of the low-cost leadership strategy is a major emphasis
on efficiency. By keeping
the lowest costs among providers in the HCO’s target region,
the organization is effectively
positioned to attract and maintain service recipients on the basis
of low pricing. The HCO is
also better positioned to match other providers’ pricing
strategies for extended periods, as
competitive bidding for major contracts becomes a way of life
in a managed-care industry
environment.
The use of the low-cost leadership strategy has its challenges.
Because the HCO is competing
basically on price, the organization must have a clear
understanding of its costs for rendering
its services. Administrative and indirect costs must be kept to a

minimum. With the use of the
low-cost leadership strategy, the services offered by an HCO
focus more on the fundamentals
and less on the frills. In the face of price competition,
differences between costs and rev-
enues—margins—are typically reduced with this strategy,
making higher volumes necessary
to maintain operating surpluses. All this requires an excellent
management information sys-
tem to track actual costs of care and revenues generated. An
overall low-cost strategy could
be adjusted for a focused low-cost strategy if lower costs are
achieved for a particular service
or segment in which the HCO competes with others that offer
similar services. An example of
a focused low-cost strategy is My Dentist Complete Care
Dentistry, which is a family of dental
practices in Arkansas, Kansas, Missouri, Oklahoma, and Texas.
My Dentist, which was founded
in 1983 by Pat Steffen, DDS, offers cleaning and exams for $39
and charges $99 for an extrac-
tion. Costs are kept low at My Dentist, while patients are
provided with quality care, because
several dentists operate out of the same facility, using a single
receptionist, insurance proces-
sor, and shared equipment.
Some of the low-cost leadership strategy’s operational demands,
such as large service vol-
umes, are beyond the capabilities of many stand-alone HCOs.
Those HCOs sometimes require

integrated relationships with other providers, which will be
either peers (horizontal integra-
tion) or organizations that provide other spectrums of care
(vertical integration).
Diversification Strategies
Several strategy options may supplement or complement the
basic, or generic, strategy cho-
sen by an HCO. These strategy options are usually referred to as
diversification strategies,
and they may take many forms. Great care must be exercised in
embarking on the usage of
these strategies because the use of some of them involves
entering a new business, which the
HCO may not be administratively or financially prepared to
manage. Summaries follow for
diversification strategies that include (a) integration strategies,
as well as strategies for imple-
menting integrated relationships, or implementation strategies,
which include (b) strategic
alliances, (c) joint ventures, and (d) mergers/acquisitions.
Integration Strategies
Integration strategies take two basic forms: horizontal
integration and vertical integra-
tion. Horizontal integration strategies take the form of alliances
between providers of similar
services, such as hospital groups. Vertical integration refer s to
the major addition of services
closer to the client (forward vertical integration), such as when
a nursing home decides to add
home health services. It may also mean backward vertical
integration, where the added services
move away from the patient toward suppliers, such as in the
case of a large regional hospital that
contracts management services out to a small rural hospital,

hoping to draw patient referrals that
require more sophisticated treatment.
Achieving these integrated relationships can be accomplished
through a number of imple-
mentation strategies. These implementation strategies include
strategic alliances, joint ven-
tures, and mergers/acquisitions.
Strategic Alliances
Alliances are loose relationships among providers to achieve
certain common goals. While
contractual relationships are common, there is no exchange of
ownership or loss of ultimate
local autonomy. The organizations combining forces typically
are not directly competing
within a region.
Strategic alliances seek some of the economies of scale required
by the cost leadership strat-
egy by standardizing, for example, certain aspects of their
operations and combining their
purchasing power. These moves provide added negotiating clout
with suppliers of equipment
and materials as well as with suppliers of specialized consulting
and health program services.
One such alliance is VHA, Inc. VHA member facilities enjoy
such benefits as purchasing dis-
counts, access to consultants on operational issues, and
architectural services, among others.
HCOs may develop these alliances with suppliers to have an

assurance of supplies and to
achieve priority in order fulfillment with suppliers. For
example, a hospital may form an alli-
ance with an emergency care organization to staff their
emergency rooms instead of hiring
their own physicians. These emergency-care providers usually
provide separate patient bill-
ing and collection for rendered services.
Joint Ventures
In joint ventures, which are more formalized versions of
strategic alliances, two HCOs seek,
in various ways, to combine strengths and overcome the
weaknesses of their respective
organizations, often with some exchange or pooling of
management control of the venture.
HMOs are a prime example of this technique. Physician groups
and hospitals combine forces,
allowing the medical groups to better compete on a price basis
where services and risks
are spread over larger, combined patient volumes. The hospitals
benefit by solidifying their
patient referrals and gaining additional control over the costs of
care. In this vertical relation-
ship, both entities are better positioned to bid competitively for
the health services of large
employee groups.
Another example of joint ventures involves large, urban
hospitals providing management
contracts and specialist physicians for smaller, rural hospitals.
For example, DeSoto Regional
Health System in Mansfield, Louisiana (population 5,027) is a
38-bed acute-care hospital.
While the hospital is locally owned by the DeSoto Regional
Foundation, management is pro-

vided by Willis-Knighton Health System of Shreveport,
Louisiana, whose flagship hospital is a
902-bed general medical and surgical center.
Mergers/Acquisitions
Mergers/acquisitions, or merger arrangements, take the joint
venture a major step further.
Here, as in the joint venture, two organizations seek to do
better, together, what they had
been doing alone. With the merger/acquisition, however, the
separate organizations become
a single entity through some exchange of ownership. Typically,
the conditions driving such
a major ownership change portend dramatic, and often negative,
consequences, if ignored.
Market share, profitability, and organizational viability often
are threatened without some
major operational changes.
By combining resources and ownership, HCOs hope to achieve
greater efficiency through a
reduction in service duplication, improved and enlarged
geographic coverage, larger volumes
of care, and improvements in other critical operational aspects.
An example is Health Net’s
and Qual-Med’s $775 million merger in 1993 (H&HN Daily
Display, 2013). The combining of
their resources produced California’s largest, proprietary
managed-care organization, with
1.1 million enrollees.
Despite these potential benefits, successful mergers are difficult

to achieve. Autonomy and
managerial control are not given away lightly. Even where this
transition is successfully
negotiated, mergers often run afoul of the differences in
organizational cultures between the
merging partners. The differences can be so profound and the
personalities of the organiza-
tions so entrenched that mergers have failed to achieve
anticipated results on this basis alone.
One trend in mergers involves joint ventures of for-profit
hospitals with academic medical
centers. For example, LifePoint Hospitals, Inc., which is a
publicly traded company with 51
hospitals, has a joint venture agreement with Duke University
Health System. Similarly, Health
Management Associates has joint ventures with the University
of Florida and the University
of Mississippi Medical Center, while the Biomedical Research
Foundation Holding Company
operates LSU Health Sciences Center in Shreveport, Louisiana
(Blackmon, 2013) and a satel-
lite institution in Monroe, Louisiana (Weiner, 1994).
Acquisitions do not result in a new entity, but the acquiring
HCO does use its name on the
newly acquired organization. The acquired organization may be
left intact administratively,
with more general oversight provided by the parent
organization, or the parent organization
may staff the acquired organization with its own administrators.
Using a low-cost leadership strategy in an environment
dominated more and more by man-
aged care means partnering among service providers. The higher
overhead of stand-alone

organizations, the substantial financial risks of mistakes in
capitation expense and revenue
estimates in making competitive bids, and the bargaining power
with clients and suppliers of
larger competitor groups make it very difficult for individual
providers to effectively imple-
ment a cost/price leadership approach by themselves. Alliances,
joint ventures, or mergers/
acquisitions can provide a means for maintaining organizational
viability in the fast-changing
healthcare environment.
Blue Ocean Strategy
In their groundbreaking work, Blue Ocean Strategy, Kim and
Mauborgne (2005) describe
another approach to strategy that does not rely on the traditi onal
low-cost leadership, broad
differentiation, or focused differentiation strategies. Instead,
Kim and Mauborgne (2005)
suggest that industry assumptions be questioned and that firms
look for areas where demand
can be created and competition does not exist. They call such
competitive spaces blue oceans.
Blue oceans create demand, rather than fight over it. In contrast,
red oceans represent all the
industries in existence today that compete for the same
customers (or patients), using the
traditional low-cost leadership, broad differentiation, or focused
differentiation strategies.
Outperforming the competition in one or more of these areas is
the goal of a blue ocean
strategy (Kim & Mauborgne, 2004). Table 6.1 clarifies the
differences between red and blue
ocean strategies.

Table 6.1: Red ocean strategy versus blue ocean strategy
Red ocean strategy Blue ocean strategy
Compete in existing market space Create uncontested market
space
Beat the competition Make the competition irrelevant
Exploit existing demand Create and capture new demand
Make the value/cost tradeoff Break the value/cost tradeoff
Align the whole system of a company’s activities
with its strategic choice of differentiation or low
cost
Align the whole system of a company’s activities in
pursuit of differentiation and low cost
Source: Kim, W. C, & Mauborgne, R. (2004). Blue ocean
strategy. Harvard Business Review, (October), 76–84.
Blue ocean strategy involves increasing the value proposition
for the customer while simul-
taneously lowering costs, thus creating a new value curve, or
relationship between perfor-
mance of activities and the value received by consumers in
relation to competitors. Kim and
Mauborgne (2005, Spring) suggest that firms reference the
following four questions, which
are known as the Four Actions Framework, when they begin to
develop a blue ocean strategy:

1. Which of the factors that the industry takes for granted
should be eliminated?
Rationale for this question: The problem many industries face is
that certain
accepted practices no longer add value for the consumer, yet
everyone performs
these activities and competes with each other on the basis of
these activities.
2. Which factors should be reduced well below the industry’s
standard?
Rationale for this question: In many cases, firms have
overdesigned products or
services in their zeal to compete. The result is a product or
service that offers more
than customers want and that adds needlessly to cost.
3. Which factors should be raised well above the industry’s
standard?
Rationale for this question: The goal here is to eliminate the
compromises custom-
ers are forced to make.
4. Which factors should be created that the industry has never
offered?
Rationale for this question: This question forces the firm to
look at entirely new
value for customers and, thus, to create new demand (Kim &
Mauborgne, 2005,
Spring).
Consider the following example of the use, in effect, of a blue
ocean strategy by a healthcare
company. Danish insulin producer Novo Nordisk examined the
insulin industry and noticed

that the target market for insulin was patients’ doctors. The idea
was that the doctor had the
most influence on which insulin the patient purchased. Doctors,
for their part, wanted access
to a purer form of insulin. The 1980s saw a great deal of
progress on this front; now every-
one’s insulin was of comparable quality. As a result, insulin
suppliers had no way of effectively
competing on the basis of the product’s quality.
Novo Nordisk’s solution was to break with the industry standard
by shifting its marketing
from doctors to the patients themselves. The company explored
how insulin was sold in vials;
patients faced the challenge of dealing with syringes, needl es,
and the insulin itself. In 1985,
Novo Nordisk developed the NovoPen. The device, which
looked like a fountain pen, allowed
Section 6.2Strategies for Large Multi-Unit Organizations
the patient to administer the insulin with one click and
contained a week’s worth of the drug.
Following this innovation, vials, syringes, and needles were
eliminated. By 1989 the com-
pany had developed the NovoJet—a disposable device even
easier to use than the NovoPen. In
1999, the Innovo came along, with a built-in memory that told
the patient the amount of the
dose, the amount of the last dose, and the time between doses.
In 2010, Novo Nordisk came
out with the NovoLog for type 1 diabetes.
By adopting a blue ocean strategy, Novo Nordisk became a

diabetes care company rather
than just an insulin producer. The company’s innovations
transformed the insulin indus-
try. Prefilled insulin devices are the primary way insulin is
delivered to diabetes patients
today. Novo Nordisk commands 60% of the insulin market in
Europe and 80% in Japan
(Gabel, Liston, Jensen, & Marsteller, 1994).
6.2 Strategies for Large Multi-Unit Organizations
As companies become more diversified and complex, the
industry analysis that is useful to
a single organizational unit operating in one industry becomes
less meaningful because of
multiple businesses operating in multiple industries. For
example, a large medical equipment
manufacturer may have several divisions catering to different
healthcare providers, such as
dentists, physicians, hospitals, and so forth. Each market has its
own characteristics and spe-
cialized equipment needs that should not be lumped together for
analysis.
The Boston Consulting Group Matrix
The Boston Consulting Group created a matrix that is a useful
tool for analyzing existing oper-
ating units or divisions of a large, complex organization. Using
this matrix involves the clas-
sification of operating units or services into one of four cells,
based on relative market share
and the growth rate of the market. Relative market share is an
organization’s share of a
given market compared to competitors’ shares. The growth rate
of the market is the annual
increase in revenues/patients in a market. The classification of a
unit into one of the four cells

has strategic implications for each of the units. The Boston
Consulting Group (BCG) matrix
is shown in Figure 6.2.
Stars are operating units that generate growth for the
organization. They are in service
areas that have a high growth rate, and they have a relativel y
high market share. Stars may
require large infusions of cash to keep up with market growth.
When the market for these
units matures and market share is retained, stars become cash
cows. Cash cows are operat-
ing units with a relatively high market share, but they serve a
market that is not growing
rapidly. They provide the cash flow for the stars and the
resources to fix question marks.
Cash cows must be kept healthy and may require some
reinvestment to maintain that health.
Question marks are operating units that are in a rapidly growing
market but have a rela-
tively low market share. If successful strategies are put in place,
question marks have the
opportunity to become stars. Dogs are operating units with a
relatively low market share in
a low-growth market.
Section 6.2Strategies for Large Multi-Unit Organizations
Figure 6.2: The Boston Consulting Group matrix
The matrix can be used to classify existing operating units or
services of an organization.
f06.01_MHA 626.ai

Relative market share
f06.02_MHA 626.ai
High Low
H
ig
h
Lo
w
M
a
rk
e
t
g
ro
w
th
r
a
te
Stars
Cash cows

Question marks
Dogs
Source: Adapted from The Boston Consulting Groups.
http://www.bcg.com/about_bcg/history/history_1968.aspx
One way to think about strategies for these four different types
of operating units is to envi-
sion a finance window with a line of business unit managers
lined up to ask for money. Which
ones …

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