Strategic Market Planning

Please see attached
Strategic Planning healthcare
Prior to beginning work on this discussion forum, read Chapters 1 and 2 from our textbook and the instructor guidance along with the following resource:
The Definitive Guide to Strategic Market Planning
(Links to an external site.)
Choose one of the organizations from the list below or identify a nonprofit hospital in your community to research. Review the Mission, Vision, and Values (MVVs) statements from the organization.If the values statement is not available, please indicate that in your initial post. Please note, this same list of organizations is provided for the
Week 3 assignment
and the
Week 5 final paper
. You may want to review multiple organizations to determine which one you would like to use for those assignments. While you are not required to use the same organization in the Week 3 assignment as you this activity, you are expected to use the same organization for both the Weeks 3 and 5 assignments:
· CHRISTUS Trinity Mother Frances Health System
· Cleveland Clinic
· Henry Ford Health System
· Lutheran Services in America
· Mayo Clinic
· Medtronic
· Shriners Hospitals for Children
· Jude Children’s Research Hospital
· Stanford Medical Center
· Trinity Health
· UC Davis Medical Center
· University hospital or other nonprofit hospital in your community
· University of Texas Health (UT Health)
· Veteran’s Health Administration (VHA)
Information search tips:
Search the organization’s name on the internet. Open the homepage of the organization. Select the links for the different pages, usually located at the top of the webpage or in the footer section at the bottom of the page. In addition, you can enter the organization’s name and the topic in the search box. For example, Cleveland Clinic Mission, Vision, and Values
For additional guidance, review the following resources:
What Is CRAAP? A Guide to Evaluating Web Sources
(Links to an external site.)
Advanced Internet Search Techniques
(Links to an external site.)
Keywords Are Critical
(Links to an external site.)
In your initial post,
· Identify the organization and provide a URL to the Mission, Vision and Values page.
· Explain why the Mission, Vision, and Values are linked to the strategic plan.
· Briefly discuss two goals you would expect to find in the strategic plan for the chosen organization and include your rationale for the choices.
· Examine why it is important to include the marketing department in the strategic plan.
Your initial post must be at least 250 words and use a minimum of two credible sources to support your discussion content. The supporting resources can be the textbook as well as the required or recommended resources provided in this course, the University of Arizona Global Campus Library, or credible websites.
Scholarly, Peer-Reviewed, and Other Credible Sources
(Links to an external site.)
table offers additional guidance on appropriate source types. All referenced materials must include citations and references in APA format. Please see directions for including APA Style elements on these Writing Center pages:
APA: Citing Within Your Paper
(Links to an external site.)
APA: Formatting Your References List
(Links to an external site.)
Learning Outcomes
After reading this chapter, you should be able to
� Define the elements of the strategic management process.
� Describe the elements of strategic thinking and analysis, strategy formulation, and strategic implementation
in healthcare services organizations (HSOs).
� Describe the importance of strategic management in organizations.
� Discuss regulated markets and analyze how they affect healthcare strategic management.
� Define what is meant by the healthcare industry, healthcare sectors, a healthcare market, and an HSO local
market and summarize the implications such entities have on strategic planning.
� Describe different ways in which HSOs define success.
� Analyze the value of strategy in healthcare management.
� Describe the range of stakeholders to whom healthcare services organizations owe some duty.
1 Introduction to Strategic Management
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Section 1.1What Is Strategic Management?
You are about to embark on a journey in which you will learn how to manage an organization
so that it can
• fulfill its core mission,
• realize its long-term vision,
• live its stated values,
• define important strategies, and
• execute on tactics to meet its objectives.
To be successful, organizations providing healthcare services must continually address rapid
changes in the marketplace and constantly seek new opportunities. Leading and managing
an organization for long-term success among shifting internal realities and changing external
forces is what strategic management is all about.
The healthcare industry comprises various sectors, including medical equipment and sup-
plies, pharmaceuticals, healthcare services, biotechnology, and health insurance. In this text,
you will learn about strategic management in healthcare services, a sector with unique issues
and relationships affecting business success. Healthcare services organizations (HSOs)
focus on providing healthcare services directly to consumers. HSOs include hospitals, out-
patient surgery centers, primary care and specialty clinics, freestanding emergency rooms,
urgent care centers, nursing homes, and home health services. The defining characteristic
of an HSO is patient care, provided by physicians, nurses, therapists, and other clinical staff.
Chapter 1 sets the stage for understanding the topic of strategic management in HSOs and
the key concepts that underlie it. You will become familiar with terms that are vital to under-
standing concepts in later chapters.
1.1 What Is Strategic Management?
Strategic management refers to steering and managing an HSO so that it can fulfill its mis-
sion and vision and sustain its impact for the long term. It involves deciding the direction in
which the organization should go and what services the organization should offer. It involves
identifying emerging market forces and how they may affect the future of the organization.
For most HSOs, a key component of strategic management is to accurately identify the com-
munity’s healthcare needs and ensure that the organization’s internal capabilities can deliver
on meeting these needs. Does the organization have the people and organizational structure
to achieve success? Most important, is the strategic plan financially feasible, and will it con-
tribute to the long-term sustainability of the organization?
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Section 1.1What Is Strategic Management?
The COVID-19 pandemic in the United States highlighted the importance of strategic man-
agement in HSOs. Organizations had to quickly cycle through the steps of strategic think-
ing and analysis, formulation, and implementation to ensure their short-term and long-term
For example, within a matter of weeks,
many outpatient primary care clinics
shifted from an in-person to a virtual
experience so they could still meet the
community’s basic health needs. Orga-
nizations also had to make a multitude
of decisions around prioritizing
resources very quickly. For example, in
response to increased hospitaliza-
tions, hospitals paused outpatient
building projects to revamp inpatient
units, redirected funds to increase the
supply of personal protective equip-
ment and ventilators, and sought part-
ners to whom they could redirect
patients when their facilities were full.
Without the practice of strategic man-
agement, organizations and leaders
would have had a difficult time deter-
mining how to align resources to rise to the challenges of a new reality. Although these changes
were necessitated by COVID-19, other natural disasters such as tornadoes, hurricanes, or
fires could have large impacts on HSOs as well.
The Strategic Management Model
Just as you need a diagram, instructions, and tools to assemble a kit, so too do you need a pro-
cess or model for strategic management. Most writings on strategic management are based
on a model, which can be thought of as a conceptual representation of a device, process, or
system that enables us to visualize how the different parts, or elements, of the system relate to
one another. Models provide us with a road map as to how everything fits together. Although
a model enables us to examine the components of such a complex activity separately and in
detail, it cannot describe the difficulties that arise in the real world as people put a conceptual
model into practice. Figure 1.1 presents the strategic management model on which this text
is based.
chee gin tan/E+/Getty Images
Strategic management enables HSOs to adapt to
changes in the environment, such as an increased
need for telehealth services.
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Section 1.1What Is Strategic Management?
Figure 1.1: The strategic management model
Adapted from Strategic Planning: A Practical Guide for Competitive Success, by S. C. Abraham, 2006, Thomson South-Western.
© Emerald Group Publishing Limited.
Elements of Strategic Management
Strategic management involves three important activities:
• strategic thinking and analysis
• strategy formulation
• strategy implementation
Leadership, governance, structure, values, and culture (Chapter 2)
Strategic Thinking and Analysis
Strategy Formulation
Strategy Implementation
Engage in strategic thinking (Chapter 3)
Conduct external analyses (Chapter 4)
Conduct internal analyses (Chapter 5)
Determine key strategic issues (Chapter 6)
Develop viable strategic alternatives (Chapter 6)
Choose the best strategy (Chapter 7)
Operating and budgeting process (Chapter 8)
Communicate, execute, and monitor the strategy (Chapter 9)
Implementation and tracking (Chapter 9)
Evaluate the strategic formulation process (Chapter 10)
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Section 1.1What Is Strategic Management?
These activities are affected by the organization’s leadership, governance, structure, values,
and culture.
Strategic Thinking and Analysis
Strategic thinking and strategic analysis are ongoing activities with the aim of seeking bet-
ter strategies and business models as well as understanding the current state of what is hap-
pening inside and outside of your organization that will impact how the organization formu-
lates the strategy. Several different activities support strategic thinking and analysis.
• Engaging in strategic thinking: This exploration involves considering possible events
that may influence healthcare and affect the organization. This may involve creat-
ing scenarios of plausible alternative projections for a specific part of the future.
This involves looking at the organization’s business model to improve it or to find a
better one.
• Conducting an external analysis: An external analysis entails observing, analyzing,
and understanding what is changing in the external environment to anticipate what
the future might hold. The external environment includes regulatory requirements,
technology trends, financing options, consumer expectations, and the like—the
external opportunities and threats the organization faces. Examples that are com-
monly found in the external environment that affect HSOs include changes or new
findings in the market area demographics, community health needs assessments,
possible and current federal and state legislation, and regulations such as state
Medicaid expansion, employment and employer changes in the market, emerging
technology, and environmental conditions and events.
• Conducting an internal analysis: An internal analysis enables managers to exam-
ine and understand everything about the organization itself, especially what makes
it a strong competitor or why it is not as strong as it could be. Does it have a core
competence, an enabling culture, strong leadership, adequate financial resources,
and a good understanding of its consumers? These are the organization’s internal
strengths and weaknesses that lead to a competitive advantage or disadvantage.
Strategy Formulation
Strategy formulation, sometimes referred to as strategic planning, is a multifaceted pro-
cess that involves the following activities.
• Determining key strategic issues: This activity involves synthesizing the external and
internal analyses to focus management’s attention on the most important issues the
organization faces. The outcome of this is usually a report that is provided by strat-
egy managers, consultants, and analysts to executive teams before strategic plan-
ning meetings begin. Once the critical issues are identified, the executive team must
either validate or change the organization’s strategic identity, mission, vision, and
values to be in line with any major changes to the organization’s focus based on the
external and internal analyses.
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Section 1.1What Is Strategic Management?
• Developing viable strategic alternatives: Viable strategic alternatives are strategic
options or alternative futures from which the executive team can choose the best
option. Such options consist of adaptive strategies, market strategies, major tactics
or programs, and methods of financing.
• Choose the best strategy: Executive teams prioritize the strategic options developed
to date. Each major strategy will likely have an executive summary associated with it
to provide some insight into the anticipated impact on the organization and com-
munity. The executive team then chooses the best option based on the organization’s
mission, vision, values, and goals.
Strategy Implementation
Strategy implementation is about successfully planning and executing the strategies devel-
oped in the thinking and analysis and formulation phases, thereby enabling the organization
to achieve its vision and meet its objectives.
The actual performance of the myriad tasks involved in implementing the strategy is the pro-
cess of translating the strategy into operations.
The first phase of translating the strategy into operations is to determine what tasks will
move forward and to budget for these changes. A multitude of business plans and projects
support the major strategies developed in the formulation phase. It is important for strategic,
operational, and financial leaders to develop a process to approve business plans and monitor
The next phase of translating the strategy into operations is to communicate the plan and
move to implementation by kicking off the various projects and monitoring their progress.
Large organizations deploy a project management office or strategic planning leader or con-
sultant to guide the implementation phase, at least until most business plans are well on their
way to being operationalized. Additionally, large organizations commonly invest in technol-
ogy to track project progress and results. Smaller organizations may assign accountability to
certain executives to ensure that business plans are implemented and to track projects and
results in a spreadsheet.
Regardless of the sophistication of the technology, management must devise an information
system to collect and analyze operational data. Managers also must measure actual perfor-
mance at regular intervals and compare the information that is collated or the data that is
entered into the system against planned estimates.
Many organizations create a separate strategic initiative tracking board to separate the impact
of new initiatives from day-to day operations. When things do not go according to plan or
resources are being wasted, corrective action should be taken immediately. Finally, the strat-
egy planning process itself must be managed and improved on an ongoing basis.
Managers must often adjust strategies in response to challenges and changing conditions.
These strategy modifications affect the following year’s assessment of the organization. A
strategically managed HSO is constantly updating its information and service models to adapt
to changes occurring both internally and externally.
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Section 1.2Healthcare Markets and the Importance of Strategic Management
The coming sections in this introductory chapter explain the context of markets and competi-
tion in healthcare services, the value strategic management brings to organizations, strategic
planning process basics, and the importance of stakeholders. The remaining chapters explore
in greater detail each of the major elements of strategic management. In the end you will have
a conceptual grasp of how everything fits together. Successful strategic management takes
years of practice and accumulated experience—often people’s entire careers.
1.2 Healthcare Markets and the Importance of
Strategic Management
In this section, we examine why strategic management is important in the context of how
healthcare is delivered and what consumer choice looks like within U.S. markets.
Free Versus Regulated Markets
Capitalism allows a free market to exist and promotes competition. The United States is a
mixed economy, which means some markets are freely competitive with almost no govern-
ment intervention, and some are highly regulated, making competition very difficult. There
are a few markets without regulation affecting competition, such as art dealing, although even
these business endeavors may face certain general business regulations.
Considered to be a public good, healthcare services are a regulated market. Other regulated
markets include communications, energy, insurance, food production, trucking, and airlines.
Possible changes in regulations are an important force to consider when analyzing the exter-
nal environment. Changes to regulations can have a large impact on the sustainability of a
healthcare organization and are critical to track and understand. It is also important to pro-
vide feedback to regulators on proposed new rules or legislation.
Industries Versus Markets
The terms “industry” and “market” are often used interchangeably, but they have distinct
meanings. The collection of firms that provide similar products or services to the same
1. What are the principal elements of the strategic management process? How are they
2. How do strategic thinking and analysis differ from strategy formulation?
3. What part of strategy formulation appears to be the most difficult to do? Which part,
if not done well, would be most likely to lead to poor strategic decisions?
4. What part of strategy implementation appears to be the most difficult to do? Which
part, if not done well, would be most likely to lead to poor strategy execution?
5. How can the strategic management model assist during a major change, such as the
COVID-19 pandemic?
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Section 1.2Healthcare Markets and the Importance of Strategic Management
customers is called an industry. The healthcare industry, for example, is a collection of
diverse groups of businesses involved in some aspect of healthcare services. HSOs are one of
the industry sectors in the much larger healthcare industry. The buyers for products or ser-
vices are collectively called the market. For HSOs, buyers are patients or clients and groups
paying for healthcare services, such as government-sponsored and private insurance plans.
The buyers for biotechnology companies, another sector in the healthcare industry, are pri-
marily pharmacies and HSOs.
When conducting an external analysis for an HSO, it is important to understand the specific
markets in which the organization operates and the various buyer (patient and payer) needs.
These are called local markets. To understand patient needs, organizations define local mar-
kets as the high-volume zip codes surrounding the facility where care is offered. In HSOs
you may hear local markets referred to as “primary” or “secondary services areas.” There-
fore, an HSO may have many markets and conduct a community needs health assessment for
each market to design services to meet the needs of the local residents and payers that offer
products in the service area. In many cases, you will hear the phrase “All healthcare is local,”
and this holds true for most HSOs. HSO leaders usually approach their strategic analysis and
formulate their plans to meet the needs of local markets rather than a generalized patient
How Firms Compete in an Industry
In the overwhelming majority of industries, firms compete with each other to sell more prod-
ucts or services to customers. Often, companies are free to offer whatever products they think
people need at any price they believe people are willing to pay. If they succeed, customers buy
their product; if not, they won’t. That is the nature of competition. The fact that competition
creates winners and losers inspires firms to constantly improve.
Competition in many sectors of the healthcare industry functions differently. The usual free-
market principles of supply and demand are distorted by an extensive regulatory framework
at both the federal and state levels of government. State regulators may not allow all HSOs in
one geographical market area to offer particular services. Price caps may prevent HSOs from
charging whatever price people are willing to pay for healthcare services. Pharmaceutical
companies are free to develop any new medication they want but must get approval from the
U.S. Food and Drug Administration before it can be sold in the United States. Insurance plans
may direct people to receive services from certain HSOs and not others. Hospital emergency
departments must provide healthcare services to people even if they cannot pay for those
In many industries consumers, whether individuals or businesses, communicate through
their buying behavior exactly what goods and services they need. Companies that fail to
deliver products that satisfy customers’ needs go out of business. However, consumer buying
behaviors in healthcare services are not such clear indicators of consumer satisfaction. Dur-
ing a medical emergency, people seek services from the nearest HSO without regard to price.
Insured individuals and people eligible for public assistance are insulated from most of the
costs of their decisions on healthcare treatment. The result is that many consumers, even in
nonemergency situations, have limited incentive to search for lower cost healthcare services.
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Section 1.2Healthcare Markets and the Importance of Strategic Management
The way that HSOs best compete is to advocate and manage inclusion in insurers’ provider
networks. HSOs seek to differentiate with insurers by controlling costs and providing patient-
centered amenities. Failure to deliver healthcare services that satisfy insurers’ needs will
cause an HSO to lose its contract with the insurance company.
With the emergence of more direct-to-
consumer offerings such as retail
healthcare clinics and online virtual
care offerings, healthcare service shop-
ping and price transparency for none-
mergent care is becoming more preva-
lent in healthcare. Consumers have
more choices than ever with emerging
healthcare business models. Patients
and families continue to utilize these
new models of healthcare at growing
rates, which could signal a new era of
consumerism in healthcare.
During the strategic management
process, it is important to study the
changes in the local market shopping
behavior and the emerging healthcare
services and offerings that are under-
way to provide care to patients. As an
HSO, there are opportunities to participate in this innovation, to increase patient satisfaction,
attract new community members, and provide better care. It is important to scan the environ-
ment for emerging healthcare service models and plan to include innovation in the organiza-
tion’s strategy. Otherwise, the organization is at risk of patients leaving the system to obtain
care from a new healthcare service innovation.
Talkspace and BetterHelp are two examples of innovations in the mental health segment of
healthcare—not just because they are virtual but because they offer a simplified experience
at a lower price. For example, they offer text and in-the-moment options that traditional men-
tal health services do not offer.
Companies compete by being differentiated—that is, by developing a strong and distinctive
brand along with unique products. Through differentiation, a company can charge more for
its products because in the consumers’ minds, it is offering something that no one else is
offering. For example, in healthcare, a unique service could be the concierge medicine offered
by some primary care physician groups. This service involves people paying an annual fee or
retainer to receive enhanced physician services. The services vary, although many include
longer visits, extended annual exams with additional labs, 24/7 access to a personal physi-
cian, and home visits. MDVIP (2021) is a nationwide concierge service that offers many of the
features listed.
JohnnyGreig/E+/Getty Images
Consumer buying behaviors in the healthcare
industry are not clear indicators of customer
satisfaction; in emergency situations, individuals
seek services without regard for price.
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Section 1.2Healthcare Markets and the Importance of Strategic Management
Differentiation can, depending on the
product or service, be achieved by
offering customers superior quality,
product features, technology, conve-
nience, selection, style, performance,
safety, comfort, reliability, cost savings,
warranties, a return policy, customer
service, and so on. The key is to differ-
entiate based on the customers’ actual
needs, not on what the business thinks
they need. When consumers perceive
that your product or service features
best meet their needs, they will buy it
and be willing to pay more for it.
Businesses compete based on many
other factors beyond product or service attributes. Durable medical equipment companies
may offer customers on-time delivery of home care equipment. Hospitals may win various
awards for specialty care programs, such as the Joint Commission’s certificate of distinction
for primary stroke centers. Teaching hospitals may offer patients opportunities to partici-
pate in medical research studies. A community-based organization may provide a closer con-
nection between patient and provider as well as a higher service level from staff. The list is
endless. As with product and service differentiation, the point is to address the needs of the
customer or healthcare consumer.
Within the strategic management process, the internal analysis identifies what components
internal to the organization can lead to differentiated offerings or experiences. Addition-
ally, the external analysis helps provide guidance on where an HSO can differentiate among
HSOs are increasingly cooperating
with other organizations rather than
competing and negotiating fiercely.
They do this through partnerships,
agreements, and joint ventures. For
example, doctors, hospitals, payers,
and other HSOs are coming together to
provide coordinated services to groups
of patients. Often called value-based
care partnerships, these partner-
ships consist of HSOs and payers
together managing cost of care and
quality of care for a certain population.
Such an instance of cooperation is
described as an agreement or strategic
alliance, whereby organizations part-
ner for their mutual benefit but retain
gorodenkoff/IStock/Getty Images Plus
In the healthcare industry, organizations compete
by being differentiated, such as offering more
advanced technology and specialty care programs.
PeopleImages/E+/Gettty Images
Strategic partnerships can help HSOs improve their
operations and offer additional services to their
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Section 1.2Healthcare Markets and the Importance of Strategic Management
their distinct identity. Other kinds of strategic alliances exist, including simple contracts for
services rendered at one end of the scale (minimum commitment) to minority ownership of
another organization or joint venture at the other (heavy commitment).
The Case Study: Community Cooperation Is Hospital’s Strategic Imperative feature illustrates
how a facility might reach out to strategic partners to improve operational efficiency and
financial performance.
Case Study: Community Cooperation Is Hospital’s Strategic
Western Hospital is a 400-bed, publicly owned teaching facility. Like many public hospitals,
it is struggling with the financial challenges of serving patients who have limited resources.
Unemployment in the community where the hospital is located is 11% and on the rise. More
than half of the hospital’s patients are uninsured or covered by the state’s Medicaid insurance
plan. Although patient volumes have increased each year, so have the losses associated with
bad debt.
Because Medicaid payment rates typically cover the cost of care and do not cover housing
costs, the hospital has agreed to share the cost of the housing with the state, in hopes of
decreasing emergency room utilization and readmission rates. Additionally, Western Hospital
has received a donation to cover the start-up costs of the housing project.
To make this project successful, the organization and its partners will need to explore addi-
tional tactics to gain the trust of the community members who need the services, move for-
ward with the housing development, and build strong partnerships with local organizations.
These plans include several cooperative initiatives.
• Add care coordinators and social workers to the emergency room to enable more
intense care coordination of those experiencing housing insecurity.
• Contract with additional community-based social services organizations to assist in
post-acute social work services.
• Implement a primary care model for the patient population, which requires patient
trust as well as cooperation from community and public health providers.
• Collaborate with specialty providers, including mental healthcare providers, and
define best practice roles, services, and referral mechanisms for patients with chronic
conditions who are facing housing insecurity.
• Partner with an experienced housing partner that can operationalize and run the
housing unit.
Questions for Critical Thinking and Engagement
1. Reviewing the case study, why would an academic healthcare organization want to
invest in housing for its community members?
2. What strategic goals do you think this helps the organization meet?
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Section 1.3What Is Success?
1.3 What Is Success?
Most HSOs have one or more purposes they are trying to achieve. These purposes can be con-
strued to represent what the business considers being successful. The mission of an HSO may
be to provide the best patient care, with business survival as the underlying purpose. Survival
means having the ability to continue meeting operating expenses and investing in new strate-
gies. Surviving means enduring so the mission can be fulfilled. Other measures of success for
HSOs include the ability to make a profit, maintain or grow market share, increase net worth
and shareholder value, retain providers and staff, improve patient satisfaction, and develop
strong brand equity.
Profit is a reason why HSOs are able to stay in business. Profit is the difference between rev-
enue and expenses in addition to nonoperating gains and losses. Even HSOs designated as
nonprofit entities must have more revenue than expenses, or survival is jeopardized. A non-
profit organization may make a profit, but it does not distribute its profit to individuals or
shareholders as does a for-profit organization. Net profit is what is left over after all allowed
expenses have been deducted from revenue over a specified period. For taxable organiza-
tions, this bottom line is called the net income after taxes. Other kinds of profit, evident on
any organization’s income statement, include gross profit; operating profit; earnings before
interest, taxes, depreciation, and amortization; earnings before interest and taxes; and net
income before taxes.
Operating revenue—income earned by delivering patient care services—is the primary
source of HSO revenue. This revenue is further divided into two categories.
• Gross patient service revenue is the amount of money the HSO would make if it
were paid the total amount billed for services delivered. However, many HSOs are
1. Describe two sectors of the healthcare industry. Where do their customers differ and
perhaps cross sectors?
2. Describe your local healthcare market. What area of the state, county, or city does
your market cover? What are the top healthcare community needs listed in publicly
available information? What major HSOs are competing in this market?
3. What retail healthcare offerings are used in your market? Does insurance cover
these offerings? If not, why do you think patients are paying out of pocket for these
4. Describe an example HSO and government or private payer and/or community part-
nership in your local market. What patient populations does this partnership serve?
5. What common organizational goals does this project aspire to meet? How is the
partnership progressing, from the information available? What competitive chal-
lenges could you anticipate based on the partnership model?
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Section 1.3What Is Success?
paid discounted rates, based on negotiated contracts with insurance plans, rather
than the full billed amount, and they never actually collect the full gross revenue.
• Net patient service revenue is the amount of money the HSO actually collects
after deducting charity care and insurance contractual adjustments. Charity care
represents services provided for which payment is never expected or for which the
patient is never billed.
Maintaining financial stability is very different for nonprofit HSOs because they cannot easily
access public equity markets as can for-profit HSOs. Nonprofits rely on philanthropy (mon-
etary gifts from individuals and organizations) as a potential additional source of funds. Both
nonprofit and for-profit HSOs also make money from ongoing business activities that are not
directly related to the main mission of providing patient care services. Some typical sources
of this other operating revenue include space or equipment rentals, research grants, fund-
ing from healthcare suppliers to test new products, and investment income. Publicly funded
HSOs, such as health departments, are financed by tax revenue, bonds, and other public fund-
ing mechanisms and may also receive some philanthropic gifts.
In addition to measuring profit, success can also be judged by the actual flow of money that
comes into and goes out of the HSO. Although this measure can change from month to month,
over several accounting periods, analysis of cash flow provides an objective perspective of an
organization’s ability to meet its operating expenses and invest in new strategies.
Market Share
Another measure of success is market share, which can be defined as a firm’s annual sales as
a percentage of the annual sales of its industry or segment. Some HSOs want to be a market
leader, whereas most aim to maintain or incrementally grow market share. What is not so
obvious to an organization wanting to increase market share is that revenues have to grow
faster than total industry revenues to achieve this goal. An example is a health system that
acquires a metropolitan hospital specializing in cardiac care to increase its dominance in this
specialty market. Organizational leaders would hope that this investment would cause the
organization’s revenue to grow faster than total industry revenues. Many HSOs lack the abil-
ity to make such substantial financial investments to grow market share. Market share can
be maintained if an HSO’s revenue grows only as fast as the industry. If revenue growth lags
behind the industry, an HSO may actually lose market share.
There is no one correct way to calculate market share. HSOs often monitor the total sales of
the served market. The served market represents all buyers able and willing to purchase or
use the service. For instance, after purchasing the metropolitan cardiac hospital, the health
system can calculate its success at increasing market share by measuring its served market
share of coronary bypass procedures. This figure represents the total number of procedures
performed as a percentage of the total number of bypass procedures done in its service area.
For publicly funded HSOs, such as community health centers, the served market is all people
in a geographic area who are eligible for free or subsidized services (often with incomes less
than 200% of the federal poverty level) and who are willing to use clinic services. The health
center would calculate the percentage of that group receiving services at the center to deter-
mine its share of the market.
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Section 1.3What Is Success?
Another measure of market share is known as relative market share. This is a calculation
of the percentage of an HSO’s sales compared to its largest competitor or the combined sales
of the three largest competitors. Comparing sales among HSOs can be problematic due to the
wide variations in pricing practices. Some healthcare market data can be obtained from fed-
eral, state, or local health regulatory agencies. Market share measurement data is also avail-
able from private, commercial companies.
Shareholder Value
If an HSO is a publicly traded, for-profit entity, shareholder value is one measure of success.
Examples of publicly traded HSOs include Hospital Corporation of America, based in Nash-
ville, Tennessee; Tenet Healthcare Corporation, based in Dallas, Texas; Encompass Health,
based in Birmingham, Alabama; and Amedisys Inc., based in Baton Rouge, Louisiana.
Shareholder value is a computed value based on an HSO’s projected cash flows for the next 10
years, discounted to the present time using discounted-cash-flow analysis and an appropriate
discount rate. From that computed value is subtracted all current debt.
The primary goal of a for-profit HSO is to return dividends to shareholders, or profit to own-
ers, over time. Nonprofit HSOs seek to further their mission, which includes making enough
money to succeed. Both have excess revenue as a goal; the difference is how that revenue is
used or distributed.
Net Worth
Calculating the net worth or value of an HSO is usually done only if the organization wants to
be acquired or if it wants to issue shares to investors. In that case, a valuation consultant is
typically engaged and uses several (usually three to five) valuation methods, eventually tak-
ing an average. Not until an organization is actually bought is its true worth or market value
established. Market value is distinct from book value, which is what is reflected on the orga-
nization’s balance sheet and which takes into account its depreciated and amortized assets,
inventory, and goodwill. Market value represents the value an asset might fetch if sold on the
open market. For example, the established patient base of a physician clinic (part of goodwill)
has one value to the clinic’s accountant and perhaps far more value to an acquirer.
Brand Equity
A brand distinguishes an organization’s product or service from others and can include a
name, term, design, or symbol. Brand equity or brand strength refers to the power of a brand
to influence purchases and loyalty. Having a strong reputation, brand, or brand equity is an
indicator of competitive success. These signify a successful differentiation on strategy and,
more than likely, a sizable market share, strong revenue growth, and healthy profits. An HSO
is doing well on this criterion when purchasers buy its services because its brand is the pri-
mary reason for their purchase decision. An example outside of the healthcare industry is
Coca-Cola. Many people opt for a Coke when they are thirsty because of strong brand loyalty.
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Section 1.3What Is Success?
For some healthcare organizations,
having a strong reputation provides a
competitive edge. Each year, U.S. News
& World Report publishes a list of the
best hospitals in the United States.
Hospitals like Johns Hopkins in Balti-
more and the University of Texas MD
Anderson Cancer Center in Houston
consistently appear on this list. This
best hospital brand is part of these
hospitals’ marketing strategies.
This competitive edge was also evident
when Cleveland Clinic entered into a
partnership with Oscar Health. Cleve-
land Clinic was searching for an insur-
ance partner that could help build
loyalty through insurance products
alongside modern care management
technology platforms. By purchasing
Oscar’s health plan products, patients
have direct, concierge access to Cleve-
land Clinic providers and an array of
virtual tools to engage in healthy living
and chronic care management (Cleveland Clinic, 2019).
Brands and reputations can increase, remain the same, or erode over time if efforts to main-
tain them aren’t made. The main reasons for brand erosion are competitors duplicating the
quality of a brand so that it is no longer unique or a company failing to perform in ways that
the brand promises. If other HSOs continue on the path to value-based care arrangements
with insurance companies, will Cleveland’s partnership with Oscar retain a competitive edge,
or will it fall behind?
Julio Cortez/Associated Press
The brand strength of Johns Hopkins Hospital
was built partly on its numerous medical and
philanthropical achievements. Recently, John
Hopkins University president Redonda Miller (right)
announced that the hospital would be collaborating
with University of Maryland Medical Center (whose
president, Mohan Suntha, is pictured on the left) in
an innovative program to offer housing and services
to the homeless in Baltimore.
1. Imagine you are an HSO chief executive officer (CEO). What measures of success
might you adopt?
2. How would these measures compare if you were the CEO of a nonprofit versus a for-
profit organization?
3. It is a widely held belief that it is enough for an HSO to be profitable. But is it
enough? What other measures might you consider using to help ensure that the HSO
will still be in business 5 years from now?
4. What have you found drives your brand loyalty as you seek healthcare services?
5. How might you know whether the HSO you work for has a competitive advantage
over its competitors?
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Section 1.3What Is Success?
The Inexorable Pace of Change
Remaining a successful HSO is an ongoing challenge. The healthcare industry today is chang-
ing at an ever faster pace compared to even a few years or a decade ago. Much of this change
is driven by the continued cost of healthcare services. Although signs point to progress under-
way as cost growth numbers reduced from 10% in the 1990s to under 5% in 2019 (as shown
in Figure 1.2), the costs per person and healthcare as a percentage of gross domestic product
(GDP) continues to climb (as shown in Figures 1.3 and 1.4).
Figure 1.2: U.S. health expenditures by percent annual change, 1960–2019
From U.S. Health Expenditures 1960–2019: On Hospitals, Physicians & Clinics, Prescription Drug by All Sources of Funds (Per
Capita $), by Peterson-KFF Health System Tracker, National Health Spending Explorer, n.d. (https://www.healthsystemtracker.
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
All types of services Hospitals Physicians & clinics
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Section 1.3What Is Success?
Figure 1.3: U.S. health expenditures per capita, 1960–2019
From U.S. Health Expenditures 1960–2019: On Hospitals, Physicians & Clinics, Prescription Drug by All Sources of Funds (Per
Capita $), by Peterson-KFF Health System Tracker, National Health Spending Explorer, n.d. (https://www.healthsystemtracker.
Figure 1.4: Total national health expenditures as a percentage of gross
domestic product, 1960–2019
From U.S. Health Expenditures 1960–2019: On All Types of Services, Hospitals, Physicians & Clinics, Prescription Drug by All
Sources of Funds (as a % of GDP), by Peterson-KFF Health System Tracker, National Health Spending Explorer, n.d. (https://www.
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
All types of services
Prescription drug
Hospitals Physicians & clinics
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
All types of services
Prescription drug
Hospitals Physicians & clinics
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Section 1.4What Is Strategy?
The rate of change is not likely to slow, as evidenced by the National Strategy for Quality
Improvement in Health Care (the National Quality Strategy), published by the U.S. Depart-
ment of Health and Human Services (HHS).
Many legislative, regulatory, and reimbursement changes were necessary to support the
National Quality Strategy and affected HSOs. Most notable was the 2010 Patient Protection
and Affordable Care Act (ACA) that encouraged HSOs to form new market relationships
through accountable care organizations or other mechanisms. A decade after the ACA, com-
mercial payers and HSOs continue to follow with numerous value-based care product part-
nerships, such as Allina Health and Blue Cross Blue Shield of Minnesota (2020). Transforming
the current model of healthcare delivery to lower overall costs continues to evolve far beyond
the passage of the ACA.
1.4 What Is Strategy?
Strategy is how an organization competes in order to fulfill its mission, vision, and values,
including its duty to patients and families in the community. This is a simple yet effective
definition. It tacitly recognizes that companies could have a bad or unsuccessful strategy and
hence not be able to compete well. Typical definitions of strategy are in fact definitions of a
good or ideal strategy. While these are commonly accepted terms, there is no agreement on a
single definition of a good or ideal strategy.
The Strategy Formulation Process
First and foremost, strategy formulation is a process. An HSO collectively tries to agree on
its core purpose (its mission), where it is going (its vision), and how it is going to get there
(its strategy). These are the principal purposes of strategy formulation. Other valid purposes
include achieving success as the organization defines it, such as improving the health of the
community it serves or increasing its market share, long-term profitability, or shareholder
1. Discuss elements in your own life that have changed faster than you would have
imagined. How did the changes happen?
2. What healthcare services are available now that did not exist 5 years ago? Three
years ago?
3. What are some healthcare services that may become available in the next 3 to 5
years that are not now available? What do HSOs have to do to make these services
available, besides having the necessary technology?
4. How can an organization’s strategy planning process consider very rapid changes in
its environment?
5. In which areas of healthcare services do you think the most profound and rapid
changes are occurring? Why?
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Section 1.4What Is Strategy?
Yet another purpose could be to develop a core competence—a capability that gives an orga-
nization a strategic or sustainable competitive advantage. Consequently, identifying the pur-
poses to be achieved is an integral part of the process. How and whether those purposes are
achieved in reality is the job of the strategy (and management in implementing it). Therefore,
choosing the right strategy is crucial.
A critical dimension of strategy formu-
lation is who gets to participate in the
process. In a few organizations, only
the CEO participates. In others, the top
management team participates and
then relays what has been decided to
lower management levels and employ-
ees in general. In still others, partici-
pants include those who will help
implement the plan—middle manag-
ers and other key people in addition to
top management. Chapter 8 outlines a
suggested strategy formulation pro-
cess and elaborates on the importance
of involving the right people in the
Strategy formulation outcomes depend on who participates, the process used, and the infor-
mation on which decisions are based. Because of these variables, planning remains very much
an art. It is a highly creative yet disciplined process that draws on the intuition, experience,
know-how, and powers of persuasion of those involved.
While the strategy formulation process is relatively straightforward, actually doing it is much
more difficult. People seldom agree on where the organization stands and how it is perform-
ing. This disagreement occurs because they have a limited perspective, do not have access
to the same data, or have personal or hidden agendas. Sometimes politics gets in the way of
truthfulness. The information that the organization and its people possess (for example, on
market share and competitors) may be incomplete, dated, inaccurate, or irrelevant, while the
information they most need is often unavailable.
Finally, the planning horizon is typically 3 to 5 years in the future, a future that is unknown,
ambiguous, and changing. With the rapid changes in the environment due to policy changes,
major consolidation announcements, health crises like COVID-19, and emerging technolo-
gies, many HSOs have added annual or even biannual strategic formulation retreats. These
may be conducted as scenario planning exercises versus a complete strategic planning pro-
cess to ensure the organization can adapt during such accelerated change.
Strategic Decisions
Besides deciding on a vision and the best strategy for achieving it, strategy formulation is
often used to make other strategic decisions. Strategic decisions differ from operational or
tactical decisions (discussed next) primarily because their complexity and consequences are
more consequential for the organization. For this reason, strategic decisions tend to be made
SDI Productions/E+/Getty Images
Who participates in strategy formulation differs
depending on the organization.
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Section 1.5Importance of Stakeholders
only after appreciable analysis, discussion, and debate among a number of people. Examples
of strategic decisions include selecting a strategy, deciding which entity to acquire or merge
with, choosing which technology to adopt, deciding whether to form a strategic alliance and
with whom, deciding which new CEO or medical director to hire, deciding whether to enter
another segment of the healthcare services market, and so on.
Operational decisions and funding prioritization that bring about change are made sub-
sequent to the strategic planning process. This is because operational decisions and plans
flow from strategic decisions. Operational decisions are made when doing operational plan-
ning (discussed in Chapter 7) and involve deciding what should continue, what should stop,
and what should be added to actives to support the strategy plan. This includes changes in
programs, activities, tasks, and projects as well as who will do it, who is accountable, what
amount of budget is allocated, and when it must be completed. Examples of operational deci-
sions include upgrading the electronic health record (EHR) system, hiring additional staff,
reducing costs, financing an initiative, purchasing equipment, bolstering cash reserves, and
so on.
Tactical decisions are the who, what, when, and where of the operational decisions. They are
the specific tactical decisions and actions to support the operational plan.
1.5 Importance of Stakeholders
Stakeholders are the individuals who are involved in and are directly or indirectly affected
by the situation and, in this case, the organization’s strategy and decisions. Stated more
simply, stakeholders are those entities to whom an HSO owes a duty or obligation. Several
groups of people or companies can be defined as stakeholders, including patients and fami-
lies, employees, employed or independent physicians, investors, creditors, third-party payers,
1. Why is it important to discuss duty to patients and the community in the context of
healthcare strategy?
2. Most healthcare organizations plan 3 to 5 years out. What case could you make for
an annual planning cycle and plan?
3. Some large healthcare systems participate in futurism planning and look 20 to
30 years into the future when making decisions. How might strategy formulation
be different with such long planning horizons? What other information or analysis
might such healthcare systems require to help them make more robust decisions?
4. Operational decisions flow from strategic decisions and must be made subsequently.
Are they less important? Why or why not?
5. Managers used to making operational decisions are often promoted to executive-
level positions. What difficulties might they encounter as they transition from mak-
ing operational decisions to making strategic ones?
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Section 1.5Importance of Stakeholders
host communities, and even the environment. While the role of each entity may differ in its
involvement, each nonetheless has a stake in the HSO.
Consumers are recipients of health-
care services; for example, patients,
residents, and clients. Consumers are a
group with a significant stake in HSOs.
All are concerned with cost and quality
and have increasing uncertainty about
access. Every HSO makes promises to
its consumers, either explicit or
implicit, that when they use a service,
it will perform as expected and will not
harm them. For most HSOs, consumers
are more than just a source of revenue.
HSOs strive to keep the promise for
high-quality patient care. Healthcare
consumers are represented collec-
tively by various groups such as the
AARP, the American Cancer Society, and the American Heart Association.
Since employees are the ones who provide the healthcare services, they are also vital HSO
stakeholders. If the business fails, employees lose their jobs. If the organization cannot recruit
and retain employees, it will have difficulty competing. Additionally, if employees are not sat-
isfied, it could affect patient satisfaction. Therefore, HSOs are typically very focused on how
they treat their employees. Employees are highly valued and sometimes are co-owners of
the company. Organizations that highly value their employees invest in them, train them, and
provide long-term benefits.
For several decades, most physicians functioned independently from hospitals and simi-
lar provider facilities. Physicians worked in the facilities to care for their patients, although
most were not employees. In this arrangement, physicians function much like a consumer
stakeholder—recipients of the services offered by the HSO—and also like an employee stake-
holder—individuals owed a duty by the HSO.
The rapidly changing healthcare environment is altering stakeholder relationships among all
HSOs. The increasingly challenging economic conditions are affecting physicians in particu-
lar. Hospitals are employing physicians, known as hospitalists, to care for patients. Physician
groups are integrating or partnering with provider organizations to limit their exposure to
economic risks. HSOs are employing specialist physicians directly. Whatever the relationship
kali9/E+/Getty Images
Those who participate in walks sponsored by the
American Cancer Society and other organizations
are healthcare consumers.
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Section 1.5Importance of Stakeholders
between HSOs and physicians, they will always remain key stakeholders in the strategic
objectives of HSOs.
Publicly and privately held for-profit HSOs have investors. Stockholders, or shareholders, are
the stakeholders that first come to most people’s minds. Investors in privately held compa-
nies are not called stockholders or shareholders but simply investors. Investors have taken
a risk by investing in the HSO and expect to be appropriately rewarded. For publicly traded
HSOs, the rewards come in two forms: stock appreciation and dividends. It is conventional
wisdom that unless companies provide such returns, investors will withdraw their money
and invest elsewhere.
Not-for-profit HSOs also have investors who purchase bonds and other debt instruments
issued by the HSO. Do not forget taxpaying citizens, whose tax revenue is invested by the
government in publicly owned, nonprofit HSOs such as school-based health clinics, county
hospitals, and public health departments.
Creditors are another form of stakeholder. These are banks, other financial institutions, or
individuals who loan the HSO money. If loans are not repaid as agreed, the HSO may find it dif-
ficult to continue getting new loans when it needs capital and could damage its credit rating,
thus raising the interest rate on future loans.
Creditors also include anyone to whom the HSO owes money, such as a supplier that has sold
equipment to the HSO for which payment has not yet been made or employee wages that have
not yet been paid.
Third-Party Payers
Third-party payers are entities other than the patient (first party) or healthcare provider
(second party) involved in the financing of personal healthcare services. Third-party payers
include Medicare, Medicaid, managed care organizations, indemnity insurers, and businesses
that contract for healthcare services.
Since the advent of Medicare and Medicaid, federal and state governments have become a
dominant stakeholder in the healthcare industry. Unlike other third-party payers, govern-
ments also serve as regulators and providers through public hospitals, state and local health
departments, veterans’ health facilities, and other HSOs.
Managed care organizations may be owned by insurance companies just as indemnity plans
are, or they may be owned by or participate in a value-based-care joint venture with HSOs,
hospitals, physicians, or consumer cooperatives. Ownership or a joint venture by an HSO
changes the stakeholder relationship—the third-party payer is no longer an external stake-
holder; it is part of the organization.
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Section 1.5Importance of Stakeholders
Host Communities
Host communities, which are towns or cities where HSOs are located, are considered to have a
stake in the organization as well. Stakeholders in host communities encompass many groups:
• people living or working in the community
• businesses
• schools
• religious institutions
• volunteer groups
• civic leaders
• newspapers and other media
While some HSOs feel the largest responsibility they have to a host community is to pro-
vide employment, other HSOs take a more active role in the community. Most hospitals have
a mission statement that reflects a commitment to promoting health and well-being in the
community. It is particularly important for tax-exempt HSOs to engage host communities as
stakeholders because of federal regulations requiring these HSOs to perform a community
health needs assessment every 3 years or be subjected to a fine. In the assessment, most
HSOs will identify how they plan to meet any unmet needs, and if they are not the only stake-
holder involved in meeting the need or cannot meet the need due to scope of services, they
will explain how the community can access these services outside of the organization. One
example may be when an HSO finds in the local community health needs assessment that
fresh food availability is lacking in an area, the HSO may not provide fresh food, but the HSO
may outline a grocery partner that is working to offer fresh food in the area.
Local and tribal health departments seeking accreditation by the Public Health Accreditation
Board (PHAB) must collaborate with host communities by participating in or conducting a
community health needs assessment similar to the requirements of the ACA. These health
departments must also engage with the public health system and the community to identify
and address public health problems, promote the community’s understanding of and sup-
port for policies and strategies that will improve the public’s health, and conduct a compre-
hensive planning process resulting in a tribal/state/community health improvement plan
(PHAB, 2021).
Also very important is the role of the environment as a stakeholder for HSOs. What duty
do healthcare organizations owe the environment? In the past, the answer to that question
would be very little. For years, medical waste found its way into rivers and lakes. In the past,
some employees were forced to work in hazardous environments without adequate protec-
tion. According to Health Care Without Harm (2020), the global climate footprint of health-
care is equal to the annual greenhouse gas emissions from over 500 coal-fired power plants.
Today there is increased focus on reducing healthcare’s footprint on the environment. New
hospital and clinic buildings are incorporating designs, technology, and features to reduce
their carbon footprint and to be more environmentally friendly. These initiatives range from
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Summary & Resources
the smallest of critical access hospitals to the largest of healthcare entities. For example,
Western Wisconsin Health, a critical access hospital in Wisconsin, was the first Silver LEED–
certified hospital in Wisconsin (U.S. Green Building Council, 2021).
Additionally, in 2016 Kaiser Permanente initiated a plan to go green by 2025. One of the
stated goals of the plan is to become carbon net positive by buying enough clean energy and
carbon offsets to remove more greenhouse gases from the atmosphere than it emits (Kaiser
Permanente, 2021). You can visit Kaiser Permanente’s YouTube channel to view a tour of one
of its newly built Platinum LEED–certified green hospitals in San Diego.
Many HSOs are going green because they believe in not wasting or degrading precious
resources and also because it has become a value embraced by their employees and consum-
ers. Thus, in many ways, the environment is an important stakeholder. Additionally, environ-
mental disasters such as fires and hurricanes that directly affect hospitals have increased
organizational awareness on readiness and their own impact on the environment.
Summary & Resources
Chapter Summary
• Strategic management is a complex process fundamental to an organization’s ongo-
ing success. It includes strategic thinking and analysis, strategy formulation, and
strategic implementation. Successful HSOs use feedback from their planning and
operations to improve their future decisions.
• Strategic thinking and analysis are fundamental drivers of good strategic manage-
ment and decision making. Strategic thinking and analysis involve having as accu-
rate a perception as possible of an organization’s internal and external environ-
ments. The extraordinary pace of change in healthcare is making the job of strategic
1. Who are the stakeholders in your life—in other words, those people to whom you
owe a duty or obligation? Which of them are important, and which have you never
thought about until now?
2. Who are the main stakeholders for an insurance company? Does an insurance com-
pany view the patient differently than an HSO? If so, how?
3. Who are the stakeholders for a nursing home? Do you believe that the most impor-
tant stakeholder—the consumer—is often ignored? Why might this be so? Which
stakeholders are given the most attention? Why?
4. For-profit HSOs often come under fire for catering only to themselves and their
stockholders. Do they serve other stakeholders? If so, why aren’t they perceived as
serving other stakeholders?
5. What is the business case for an HSO to go green? What contribution would you like
to make in an HSO’s journey to go green?
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Summary & Resources
thinking more difficult and urgent. Doing strategic formulation without strategic
thinking leads to poor strategies and decisions.
• Strategy formulation is the means of deciding which strategy the organization
should pursue to be more successful in the future. In the rapidly changing healthcare
industry, making decisions without good data, analysis, and the inputs of those who
will have to implement the strategy is foolhardy.
• Strategy implementation is about successfully planning and executing the strategies
developed in the thinking and formulation phases, thereby enabling the organization
to achieve its vision and meet its objectives.
• Competition is a capitalist society’s way for consumers to tell producers what they
need and want to buy. An HSO and its competitors constitute a large sector of the
healthcare industry and serve markets composed of groups of consumers. Markets
are often confused with industries, but they are different: The former buy products
and services, while the latter produce them.
• Most HSOs have one or more purposes they are trying to achieve. These purposes
can be construed to represent what the business considers being successful. Profit
is one popular reason why HSOs stay in business. Another measure of success is
market share. If an HSO is a publicly traded, for-profit entity, shareholder value is
one measure of success.
• Strategy is how a company actually competes. Strategy formulation is a process. An
HSO collectively tries to agree on its core purpose (its mission), where it is going (its
vision), and how it is going to get there (its strategy). These are the principal pur-
poses of strategy formulation.
• An organization owes some measure of duty to its stakeholders. These include
consumers, employees, physicians, investors, creditors, third-party payers, host
communities, and the environment. Ideally, an HSO should fulfill its duty to all its
Critical Thinking and Analytical Exercises
1. How does the for-profit versus nonprofit status affect the strategy of an
2. Should we refer to patients as consumers, customers, or patients? Include your
3. Refer to Figure 1.1. When would it be effective to conduct the strategic framework in
a linear fashion? When would it be effective to work only on certain components?
4. What stakeholders have been impacted by COVID-19, and what examples can you
find that showcase how an HSO effectively responded to a certain stakeholder?
5. What possible changes to the ACA (additions or deletions) would rise to the level of
HSOs needing to refresh their strategic plan? Provide your reasoning.
Web Resources

Home Page

The website of the Kaiser Family Foundation (KFF): This source of information for health-
care trends across the United States covers changes in healthcare policy, insurance coverage,
healthcare business models, and population health.
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Summary & Resources
The website of the American Hospital Association: This is a source of information on lead-
ing healthcare organizations, including white papers, podcasts, and case studies on issues of
strategic importance.
The website of the Society for Health Care Strategy & Market Development: This site includes
resources on strategy approaches and best practices in healthcare management.
The website of the Association for Strategic Planning: This site includes articles and reports
on strategic management topics relevant to many industries, including healthcare.
This American Hospital Association site provides updates regarding government regulations
that affect hospitals.
This HHS site provides updates regarding government laws and regulations.
This California Health and Human Services website provides HSO market share in California
for inpatient care, emergency department visits, and ambulatory (outpatient) surgery.
This KFF website provides an analysis of insurance company market share data by insurance
company and state.


This website represents the Public Health Accreditation Board, which works to improve
health departments across the United States.
This site for the What the Health? podcast includes up-to-date information on the changing
landscape of healthcare.


The site for the Tradeoffs podcast includes up-to-date information on health policy changes,
including the ACA.
Key Terms
book value The value of an organization
asset shown on its balance sheet (which
might have been depreciated or amortized);
this may differ from what the same asset
might fetch if sold on the open market (mar-
ket value).
brand The ways in which an organization
distinguishes itself from others; this can
include its name, terms, symbol, or design.
A strong brand is an indication of a success-
ful differentiation strategy.
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Summary & Resources
brand equity The power of a brand to
influence purchases and loyalty. It can
increase, remain the same, or decline over
time. Also referred to as brand strength.
charity care Services provided for which
payment is never expected or for which the
patient is never billed.
core competence A capability that gives
an organization a strategic or sustainable
competitive advantage.
external analysis The act of observ-
ing, analyzing, and understanding what is
changing in the external environment to
anticipate what the future might hold. The
external environment includes regulatory
requirements, technology trends, financing
options, consumer expectations, and the
like. The end result of an external analysis is
a summary of the opportunities and threats
the organization faces.
gross patient service revenue The
amount of money the organization would
make if it were paid the total amount billed
for services delivered.
healthcare services organization (HSO) 
A business whose purpose is to provide
healthcare services directly to consumers
(for example, a hospital, nursing home,
home health service, outpatient provider
such as a physician clinic, urgent care
center, rehabilitative service, public health
clinic, and the like).
industry A collection of firms that provides
similar products or services to the same
customers; for instance, the healthcare
industry or the automotive industry.
industry sectors Subsets of an industry
that have common characteristics in their
business model, product, service, or cus-
tomer base; for instance, the hospital or the
medical device sector of healthcare.
internal analysis The act of knowing, ana-
lyzing, and understanding everything about
the business itself, especially what makes it
a strong competitor.
local market The market surrounding the
various healthcare facilities within an HSO.
The primary market area is usually defined
by 80% of patient volume in contiguous zip
codes surrounding the facility.
market The collective name given to the
buyers of the products or services produced
by an industry.
market share A firm’s annual sales as a
percentage of the annual sales of its indus-
try or segment (really industry share but
universally known as market share).
market value The value that any organiza-
tion asset might fetch if sold on the open
market; this value may differ from that car-
ried on the organization’s financial books
(book value).
model A means of codifying a complex
activity in a way that is at once easy to
explain, understand, and learn—and gives
someone a road map as to how everything
fits together.
net income after taxes On the income
statement, the amount that is left after all
allowable expenses (including depreciation
and amortization, which are accounting
artifacts and not real expenses) have been
deducted (often also referred to as the bot-
tom line). Income statements are typically
produced quarterly or annually.
net patient service revenue The amount
of money the organization actually collects
after deducting charity care and insurance
contractual adjustments.
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Summary & Resources
nonprofit organization An organization
that uses its excess revenues to achieve
its strategic goals rather than distributing
them as profit or dividends.
operating revenue Income earned by
delivering patient care services.
Patient Protection and Affordable Care
Act (ACA) A U.S. federal statute signed into
law by President Barack Obama on March
23, 2010. Together with the Health Care and
Education Reconciliation Act, it represents
the most significant government expansion
and regulatory overhaul of the U.S. health-
care system since the passage of Medicare
and Medicaid in 1965.
relative market share A calculation of the
percentage of an HSO’s sales compared to
its largest competitor or the combined sales
of the three largest competitors.
served market All buyers able and willing
to purchase or use the healthcare service.
shareholder value A computed value
based on a company’s projected cash
flows for the next 10 years, discounted to
the present time using discounted-cash-
flow analysis and an appropriate discount
rate and subtracting from the result all
current debt.
stakeholders Individuals and groups that
are directly or indirectly affected by the
strategic outcomes achieved by a business
and that have enforceable claims on a firm’s
performance; groups of people to whom an
HSO owes some form of duty.
strategic analysis Ongoing activity with
the aim of seeking better strategies. It
involves analyzing the external and inter-
nal environments; identifying competitive
strengths, weaknesses, opportunities, and
threats; drawing conclusions; and analyzing
alternative future directions.
strategic management Steering and man-
aging an organization to be successful over
time—not just for a year, but also year after
year. Strategic management involves strate-
gic thinking and analysis, strategy formula-
tion, and strategy implementation.
strategic planning Often referred to as
strategy formulation, this is a process by
which a business develops a strategy to
achieve certain purposes (what it considers
strategic thinking Continual activity that
seeks to uncover, understand, and make
sense of the changes both in the external
environment and internal to an organiza-
tion, with the aim of seeking a better strat-
egy and business model in order to compete
and fulfill the organization’s mission.
strategy How an organization competes
in order to fulfill its mission, vision, and
values, including its duty to patients and
families in the community.
strategy formulation Sometimes known
as strategic planning, it involves determin-
ing key strategic issues, developing viable
strategic alternatives, and choosing the best
strategy implementation The act of suc-
cessfully planning and executing the strate-
gies developed in the thinking and analysis
and formulation phases, thereby enabling
the organization to achieve its vision and
meet its objectives.
value-based care partnership A partner-
ship wherein HSOs and payers together
manage the cost of care and quality of care
for a certain population.
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Learning Outcomes
After reading this chapter, you should be able to
� Describe what strategic leadership entails.
� Compare the differences and similarities between leaders and managers.
� Discuss why strategic success depends on finding, developing, and evaluating capable leaders.
� Compare and contrast governance in for-profit and nonprofit HSOs.
� Examine the relationship between an HSO’s organization and the strategy it is pursuing.
� Analyze the importance of organizational mission, vision, values, and culture and the extent to which they
can enable or hinder strategy implementation.
� Explain how and why organizational change is inevitable and desirable if an HSO wants to improve its com-
petitiveness and performance.
2 Leadership, Governance, Values, and Culture
monkeybusinessimages/iStock/Getty Images Plus
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Section 2.1Strategic Leadership and Developing a Vision
This chapter focuses on the roles of power, leadership, organizational mission, vision, values,
culture, and attitudes toward change as they relate to strategic planning and management.
Leadership; top management and the board of directors; the organization’s mission, vision,
values, and culture; and organizational change all impact the quality of strategic planning and
are in turn affected by it.
2.1 Strategic Leadership and Developing a Vision
In articles in the business press and
the literature, the words “manager,”
“leader,” “executive,” and “administra-
tor” are often used interchangeably.
Consider, however, the implied judg-
ments in the descriptions of a person
as a real leader versus just a manager,
and it becomes evident that the terms
are different.
One might assume the only person
who creates a vision is the individual
at the apex of an organization, such as
the HSO administrator or the presi-
dent of a health system. This is not the
case. Leaders can be found at any level
in an organization. A leader is anyone who can visualize a better state of affairs and inspires
others in pursuit of this vision. A leader is anyone who is dissatisfied with the status quo, has
suggestions for improvement, and is able to convince and inspire others to change to improve
the status quo.
By contrast, managers are responsible for implementing changes and achieving performance
objectives. Managers do not need to be leaders, although what they do is nonetheless critical
to an organization’s success.
What makes leadership strategic? Strategic leadership involves creating a vision and strat-
egy that helps the organization succeed at its mission in both the short and the long term.
Whereas leadership may be required for bringing about changes or improvements to parts of
the organization, strategic leadership determines the long-term survival and success of the
entire organization.
Power in an Organization
Leaders have the power to influence or affect the people around or under them. This is true
regardless of whether they hold leadership positions. Various types of power exist in organi-
zations, including the following.
• Legitimate power is the authority derived by virtue of occupying a position in the
organization. The higher the position a person occupies, the greater the authority or
legitimate power that person holds.
skynesher/E+/Getty Images
Leaders can be found at all levels of an organization.
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Section 2.1Strategic Leadership and Developing a Vision
• Expert power is derived from a person’s unique competencies, skills, and experience.
For example, a team tasked with improving the financial position of an HSO is likely
to follow the member with the healthcare finance knowledge and skills that can
evaluate whether an idea would help lower costs or increase revenue.
• Referent power is derived from subordinates’ or followers’ respect, admiration, and
loyalty; it is often referred to as charisma.
• Leaders who have the ability to give or withhold meaningful incentives hold reward
power. Incentives can be tangible rewards such as pay raises, bonuses, or preferred
job assignments, or they can be intangible rewards such as praise or respect.
Transactional leadership relies on interactions between the leader and follower, with fol-
lowers rewarded for meeting goals set by leaders. For instance, hospital governing boards
often set performance expectations (e.g., financial and quality criteria) by which the CEO is
evaluated and rewarded. The CEO in turn sets performance expectations for top manage-
ment, top management sets performance expectations for middle managers, and so on.
Leaders in a hierarchical healthcare environment are followed primarily because the fol-
lowers benefit. For example, the relationship between hospital leadership and the hospital’s
medical staff is transactional in that leadership relies on the independent physicians caring
for hospitalized patients to assist the organization in meeting financial and quality goals. The
physicians benefit from providing this assistance—they have a hospital in which to care for
their patients that is financially strong and has a good reputation.
Transactional leadership is one of many styles or philosophies, and it relies on a mostly hier-
archical structure to be in place. A contrasting style of leadership that does not utilize hier-
archy as its main mechanism is called servant leadership. In Robert K. Greenleaf ’s classic
1971 essay, The Servant as Leader, the term “servant leader” was explored and came to be
a common leadership philosophy practiced. Servant leadership is modeled by great leaders
in healthcare administration, such as the late Bernard Tyson, the CEO of Kaiser Permanente
from 2104 to 2019. In fact, Modern Healthcare referred to Tyson as “the ultimate servant
leader” (May, 2021).
Servant leaders believe their role and actions should be aligned to serve employees and, in
healthcare, patients and families. Their focus is mainly on coaching, mentoring, unleashing
talent, engaging in team problem solving, and understanding the patient and family journey
in HSOs. The type of power found in a servant leader is usually referent power. The philoso-
phy of a servant leader is that an organization and individuals are at their best when people
are inspired and have learning and coaching opportunities. Certainly, within a servant leader
organization, there may be formal hierarchies and transactional leadership, although they
become less critical to the organization’s success.
Mission, Vision, and Value Statements
Healthcare organizations—indeed, any kind of organization—need mission, vision, and value
statements. These statements indicate the purpose, future, and culture of an organization.
Like many terms in the business lexicon, these are often misused. For large multisite and ser-
vice organizations, it is important to develop one set of mission, vision, and values to ensure
that purpose, future aspirations, and behavior are aligned no matter the geography, role in
the organization, or service specialty.
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Section 2.1Strategic Leadership and Developing a Vision
Mission Statements
A mission statement is a concise statement of an HSO’s reason for being—its purpose, what
it actually does, and for whom. It describes what services are provided for which target mar-
ket, as well as how the organization considers itself different or unique. A mission statement
should not contain descriptions of vision, values, strategies, or objectives (although many
organizations make this error). A mission statement could also contain a description of what
the HSO’s customers will experience when using its services, known as the customer value
A mission statement answers the questions “What do you do?” and “What is your purpose?”
When crafting a mission statement, care should be taken in how broadly or narrowly the HSO
is characterized. For example, an organization could conceive of itself as a primary care clinic
or as a public health clinic, the latter precluding work or involvement in the private sector. It
could be a home health agency or a hospice agency, the former being broader and the latter
more restrictive in the services provided and the target consumers.
Suppose that in the course of conducting its strategic analysis and planning, an organization
found that it would be necessary to reach beyond the current market to be sustainable, and it
partnered with a national health system. If its existing mission statement characterized it as
being local in scope, the mission statement would need to be modified and aligned with the
new reality. This is why both the mission and vision statements are created before a business
or service is introduced into the market and are reconsidered at the end of the strategic plan-
ning process for organizations with a long history.
Consider the following example of a poorly written mission statement:
Care. Trust. Heal.
Although the statement is short, as recommended by some management consultants, it is
more of a marketing slogan than a mission. Missing is what the organization actually does
and for whom, and so on. Contrast this with the mission statement of the Mayo Clinic (2021)
in Rochester, Minnesota:
“Inspiring hope and promoting health through integrated clinical practice,
education and research” (para. 1).
It is obvious from this mission statement that patients and health are the primary reason the
Mayo Clinic exists. How the organization strives to provide patient care and improve health is
clearly articulated through the three focus areas of clinical practice, education, and research,
which are referred to as the Mayo Clinic’s three shields. The three shields drive all of the pri-
orities and work in the organization.
The Mayo Clinic is a large, integrated system, and therefore its mission is quite broad as well.
An example of an HSO that has a more niche service and patient population is the Hazelden
Betty Ford Foundation (HBFF). Its mission statement clearly articulates its niche service and
“We are a force of healing and hope for individuals, families and communities
affected by addiction to alcohol and other drugs” (HBFF, 2021, para. 3).
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Section 2.1Strategic Leadership and Developing a Vision
With the emergence of telemedicine, technology companies focused on virtual care are form-
ing mission statements that signal a commitment to innovation. For instance, Doctor on
Demand’s (2021) mission statement is as follows:
“To improve the world’s health through compassionate care and innovation”
(para. 3).
Mission statements are a communication device—they inform internal stakeholders (e.g.,
physicians, managers, staff members) as well as external stakeholders (e.g., consumers, com-
munities of interest, investors) about the HSO’s purpose and main services. The mission
statement can also serve as an internal framework to prioritize decision making, resource
allocation, and planning.
Vision Statements
Does a strategic leader simply conjure up in isolation a vision for the organization? Do effec-
tive leaders rely on others in the organization to support the development of a realistic vision?
Let’s examine the nature of organization vision statements and the approaches used to create
them. A vision statement is a concise expression of where the organization sees itself in the
next 5 or 10 years. What makes an effective vision statement? The vision statement should be
concise, be inspiring to external and internal audiences, paint a picture of the future, be spe-
cific enough to measure whether the organization is achieving its vision, and have a timeline
For example, the Mayo Clinic’s (2021) vision is as follows:
“Transforming medicine to connect and cure as the global authority in the
care of serious or complex disease” (para. 2).
Although this vision is inspiring, how will the Mayo Clinic determine when and how its vision
has been achieved?
Although it is not common to publicly share goals and timelines for competitive reasons and
due to targets changing over time, vision statements are most impactful to employees in an
organization when there is a timeline and quantitative measure. It is likely that the Mayo
Clinic has determined how to measure whether it is transforming medicine and whether it is
the global authority. Ideally, the Mayo Clinic would cascade metrics and measures of success
throughout the organization so all can understand their part in achieving the vision.
It is imperative that a healthcare organization’s strategy and vision be aligned. This is why an
organization should review and, if necessary, revise its vision statement on an ongoing basis.
Visionary leaders should collaborate with other top managers and their board of directors to
craft a vision statement that embodies their vision and makes sense to all the organization’s
stakeholders. Getting everyone’s agreement takes time; however, such collaboration is neces-
sary if the vision is to be truly shared and owned by everyone. A great vision becomes realized
only when every person in the organization contributes toward its achievement and does not
merely rely on those at the top.
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Section 2.1Strategic Leadership and Developing a Vision
Value Statements
Value statements are an expression of a set of beliefs that guide the behaviors, decision
making, and culture of the organization. Values signal to employees, future employees, part-
ners, and the community how the organization works and how stakeholders can expect to be
treated while interacting with the organization. Value statements are written in desired terms
to drive behavior and articulate behavior that is ideal. Some organizations include values in
annual reviews for employees to understand how they are contributing to the culture of the
In HSOs, many organizations begin their value statements around the patient and family
experience. For instance, the Mayo Clinic (2021) states its primary value as follows:
“The needs of the patient come first” (para. 3).
See Mayo Clinic Mission, Vision, and Values for a complete list of the Mayo Clinic’s mission,
vision, and values. Table 2.1 lists characteristics of mission, vision, and value statements.
Mayo Clinic Mission, Vision, and Values
Inspiring hope and promoting health through integrated clinical practice, education and
Transforming medicine to connect and cure as the global authority in the care of serious or
complex disease.
Primary value
The needs of the patient come first.
Value statements
These values, which guide Mayo Clinic’s mission to this day, are an expression of the vision and
intent of our founders, the original Mayo physicians and the Sisters of Saint Francis.
Treat everyone in our diverse community, including patients, their families and colleagues,
with dignity.
Adhere to the highest standards of professionalism, ethics and personal responsibility, worthy
of the trust our patients place in us.
Provide the best care, treating patients and family members with sensitivity and empathy.
Inspire hope and nurture the well-being of the whole person, respecting physical, emotional
and spiritual needs.
(continued on next page)
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Section 2.1Strategic Leadership and Developing a Vision
Table 2.1: Characteristics of mission, vision, and value statements
The mission statement
focuses on current activi-
ties—who we are and what
we do
The vision statement
concerns the future path—
where we are going
The values of an organization signal
how we do our work and how we
treat our patients, families, partners,
and employees
Current service offerings Markets to be pursuedGuiding beliefs
Consumer needs being
Future service–customer
Desired behaviors
Operational and business
Kind of organization that
management is trying to
Desired culture
Mayo Clinic Mission, Vision, and Values (continued)
Value the contributions of all, blending the skills of individual staff members in unsurpassed
Infuse and energize the organization, enhancing the lives of those we serve, through the cre-
ative ideas and unique talents of each employee.
Deliver the best outcomes and highest quality service through the dedicated effort of every
team member.
Sustain and reinvest in our mission and extended communities by wisely managing our
human, natural and material resources.
Source: Mayo Clinic, 2021.
1. Are most CEOs and presidents of healthcare organizations strategic leaders? Why or
why not?
2. What is the difference between transactional leadership and servant leadership?
3. What is the purpose of creating organizational mission, vision, and value statements?
4. What components of effective mission, vision, and value statements seem to be most
important in terms of leading others? Explain your response.
5. Should every employee in the organization be able to recite the mission statement?
The vision statement? The values? All of the above? Why or why not?
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Section 2.2Leaders and Transformational Change
2.2 Leaders and Transformational Change
Warren Bennis, a pioneer in the contemporary study of leadership, once said, “Managers do
things right; leaders do the right thing” (Bennis & Nanus, 2012, p. i). Bennis’s words echo a
common saying in business that leaders create change while managers implement change.
Strategist and author Robert Allio has written on the differences between leaders and manag-
ers. The key differences he describes are summarized in Table 2.2. Allio contends that good
leaders must have good character and integrity, a personal style that balances managing with
leading, a commitment to collaboration, and adaptability. Lastly, leaders are self-made, and
good leadership requires constant practice (Allio, 2009).
Table 2.2: Leaders vs. managers
Leaders Managers
Take the long view Take the short view
Formulate visions Make plans and budgets
Take risks Avoid risks
Explore new territory Maintain existing patterns
Initiate change Transact
Transform Control
Empower Enforce uniformity
Encourage diversity Invoke rationality
Invoke passion Act amorally
Source: “Leadership—the Five Big Ideas,” by A. J. Allio, 2009, Strategy & Leadership, 37(2), pp. 4–12. Used with permission.
Is it difficult to be a leader? The list of
attributes in Table 2.2 might appear
daunting. But to someone who seeks
out challenges, learns from experi-
ence, works well with others, takes
the initiative, and practices leader-
ship, it is a natural progression to
leadership positions with ever-
increasing responsibility.
Communication and
Effective Leadership
Although personality, business acu-
men, legitimate power and authority,
and expertise are factors in leadership
ability, communication competence is
skynesher/E+/Getty Images
Effective leaders know how to make others feel
comfortable, using behaviors that create a sense of
personal connection.
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Section 2.2Leaders and Transformational Change
central to the practice of influence and leadership in organizations. Without the ability to
relate to others, influence and leadership are virtually impossible. A foundation of strong
relational and communication skills is critical to the ability to inspire and motivate others and
to encourage the pursuit of organizational vision.
Impression Management
Leadership effectiveness and communication satisfaction within organizations rely heavily
on perceptions of individuals in formal or informal leadership positions. Thus, strong leaders
are able to manage others’ perceptions and have a heightened degree of self-awareness. They
must be aware of what is appropriate in a given situation, possess the skills to deliver it, and
demonstrate the motivation for accomplishing excellence.
Effective Message Content
Good leaders pay a great deal of attention to the content of their messages. They approach
their leadership communication as a goal-directed activity rather than a mindless task. They
craft their messages strategically so as to provide others with a clear sense of their vision. The
content of their formal and informal messages should be motivational and inspirational and
should succeed in convincing others that behaving consistently with the leader’s or organiza-
tion’s vision is in their own best interests. Leaders must also have unquestionable ethics and
engage in this type of influence thoughtfully.
Strong Message Delivery
Effective message delivery is central to leadership effectiveness. Numerous research studies
point to the importance of message exchanges that foster a sense of connectedness among
communicators. Although connection can be difficult to define, studies have isolated the fol-
lowing factors as important in reducing the psychological distance between people:
• smiling
• using others’ first names in conversation
• using appropriate touch and physical distance
• making eye contact
• removing physical barriers (e.g., sitting on the same side of a table with the other
communicator and avoiding using lecterns during public presentations)
• engaging in some degree of self-disclosure
• using animated facial expressions
Communicator Style
Communication researcher Robert Norton (1983) identified nine primary communicator
styles that nearly 40 years of research have consistently supported (see Leader Communica-
tor Styles). These styles give some insight into the repertoire of communication behaviors
available to foster leadership and encourage influence. As you read about each, consider the
situations in which they would be most appropriate. Although an individual may have a pri-
mary communicator style, people can borrow habits from each style. The most competent
communicators are flexible and adaptive in their approaches to different situations.
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Section 2.2Leaders and Transformational Change
Effective leaders understand that impression management, strong message content, and
effective delivery are central to their ability to influence others. Further, they recognize that
there is not one perfect communicator style for a leader. Strong leaders are adept at analyzing
people and situations and selecting a message, delivery approach, and style that best fits the
Leader Communicator Styles
An animated leader relies primarily on nonverbal
behaviors such as gestures, eye contact, and facial
expressions to motivate others. An individual who
fits this profile but is not able to draw on behaviors
associated with the other styles will lack influence
in contexts other than face-to-face communication.
An attentive leader relies primarily on listening skills
to exert influence. Through both verbal means (e.g.,
asking questions, paraphrasing, and validating oth-
ers’ positions) and nonverbal means (e.g., making
eye contact, nodding their head, and leaning for-
ward), attentive communicators illustrate that they
value individuals and their ideas.
A contentious leader is argumentative and challeng-
ing in communication with others. These leaders
often challenge others to prove or support their positions. Although the contentious commu-
nicator can be challenging to work with, this style can enable transformation by encouraging
others to think outside the box. This leader’s communication style and interactions with oth-
ers focus on asking questions, raising the bar, and being intellectually stimulating.
A dominant leader is similar to a contentious leader, but instead of questioning and challeng-
ing others, dominant leaders take charge of conversations and speak in a strong manner. They
tend to communicate more frequently than others in meetings and conversations. This style
suits authoritative leaders but can be less effective for leaders operating in more democratic
A dramatic leader uses narratives and expressive language to convey their positions. They may
rely on poetry, literature, or dramatic quotations from others to drive home their point.
A friendly leader influences others through frequent delivery of positive feedback and praise.
An open communicator leader expresses emotion and self-discloses personal experiences—
both positive and negative—as a way of inspiring and influencing others.
An impression-leaving leader finds ways to deliver memorable messages that others think
about after the conversation is over.
A relaxed leader is calm and understated in their approach. These leaders rarely reveal anxiety
or nervousness and react unflappably under pressure. They exude confidence and composure.
kupicoo/E+/Getty Images
Attentive leaders use eye contact to
indicate that they value the opinions
of people with whom they are
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Section 2.2Leaders and Transformational Change
Leadership Traits
It is well known that experience is the best teacher of leadership. Although experience is cer-
tainly valuable to leadership development, some key personality traits and skills can typically
be found in people with leadership positions.
• Vision is the ability to see the big picture, imagine likely futures, and infuse that
vision with passion.
• Integrity is a requisite trait because it is impossible to influence others without gain-
ing their trust.
• Communication skills, compassion, and charisma are needed to articulate one’s
vision and persuade others to embrace it.
• Leaders demonstrate strong moral and ethical principles. Attention is given to all
stakeholders, not some at the expense of others.
• A commitment to collaboration encourages everyone to work together to achieve a
• A less obvious trait of leaders is humility. Effective leaders typically give others
credit for an organization’s success but accept responsibility for poor results.
These traits make up emotional intelligence, which Daniel Goleman (2004, 2020) asserts is
the indispensable ingredient of effective leadership. Five domains constitute Goleman’s defi-
nition of emotional intelligence:
• self-awareness
• self-regulation
• motivation
• empathy
• social skills
As noted earlier in the chapter, Robert K. Greenleaf (1970) introduced the servant leadership
philosophy and defined servant leaders as those who achieve results for their organizations
by attending to the needs of those they serve.
1. What are some strategies leaders can use to manage how other people perceive
2. What are ways in which you practice perception-management strategies in your life?
3. What is the difference between a goal-directed message and a mindless message?
Explain your perspective.
4. Why is goal-directed communication more desirable for leaders than mindless
5. Consider each of Norton’s leader communicator styles. What are two situations in
which each style would be appropriate and two situations in which each style would
probably be ineffective? Explain.
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Section 2.2Leaders and Transformational Change
The importance of humility also figures prominently in the concept of Level 5 leadership,
developed by Jim Collins (2001, 2020). Collins’s research examines how companies are able to
transition from being merely good to great. He concludes that a leader builds “enduring great-
ness through a paradoxical blend of personal humility and professional will” (Collins, 2001,
p. 20). Table 2.3 further elaborates on humility and will as these traits pertain to leadership.
So where might you find a Level 5 leader? According to Collins (2001), “Look for situa-
tions where extraordinary results exist but where no individual steps forth to claim excess
credit. You will likely find a potential Level 5 leader at work” (p. 37). Level 5 leadership is
Table 2.3: Summary of the two sides of Level 5 leadership
Personal humility Professional will
Demonstrates a compelling modesty, shunning
public adulation; never boastful
Creates superb results, a clear catalyst in the transi-
tion from good to great
Acts with quiet, calm determination; relies princi-
pally on inspired standards, not inspiring charisma,
to motivate
Demonstrates an unwavering resolve to do what-
ever must be done to produce the best long-term
results, no matter how difficult
Channels ambition into the company, not the self;
sets up successors for even greater success in the
next generation
Sets the standard for building an enduring great
company; will settle for nothing less
Looks out the window, not in the mirror, to appor-
tion credit for the success of the company—to other
people, external factors, and good luck
Looks in the mirror, not out the window, to appor-
tion responsibility for poor results, never blaming
other people, external factors, or luck
Source: Based on Good to Great: Why Some Companies Make the Leap . . . and Others Don’t, by J. Collins, 2001, HarperCollins
Many providers are seeking out leadership development programs to learn how to lead other
caregivers to improve organizations and patient outcomes (Khullar, 2019). With primary care
providers being asked to transform to offer value-based care services, including shifting to
virtual care offerings, leadership skills that are facilitative in nature, as opposed to the more
common authoritative approaches, will be needed.
1. What leadership traits, if any, have you learned in your work experiences? What
traits may be more difficult to learn on the job?
2. When managers are promoted to more senior positions with substantial leadership
responsibilities, what problems might they encounter in their first year in the new
3. What is more important to a leader’s success: high intelligence and solid technical
skills or high emotional intelligence? Or are these traits equally important?
4. Do you have what it takes to be a Level 5 leader? Why or why not?
5. Recount an experience you have had that shows you have leadership potential.
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Section 2.3Developing and Evaluating Leaders
2.3 Developing and Evaluating Leaders
Leadership development in HSOs involves identifying future leaders, giving them opportuni-
ties to function in leadership roles, and providing feedback and mentoring. According to Witt-
Kieffer, an internationally known recruiting firm, many organizations have started worrying
more about succession planning in light of the COVID-19 pandemic. Boards of directors and
executive teams are revisiting succession planning beyond the boardroom and CEO by creat-
ing plans for the executive team and direct reports (we discuss succession planning later in
this chapter; WittKieffer, 2021).
Although the talent pool of external
applicants can be impressive, leaders
hired from the outside are less suc-
cessful. By contrast, the leaders of 10
out of 11 good to great companies
studied by Collins (2001) came from
inside the company. Companies that
failed to achieve great results hired
outsiders 6 times more often.
In addition to having a higher risk of
failure, recruiting external candidates
for leadership positions is costlier.
Direct costs include search fees, inter-
view costs, signing bonuses, reloca-
tion, and severance packages, among others. There are also indirect costs and post-hiring
costs. Developing people in the organization to assume leadership positions is much less
costly. Internal development costs are associated with training, education, mentoring, and
job rotation.
Finally, an organization that practices internal promotion is more likely to retain high-potential
talent. Executive retention is positively correlated with formalized succession programs.
Developing the next generation of leaders is a difficult challenge for an HSO. The organization
must have a good talent pool, which means hiring people with leadership potential in the first
place. The organization must also have a leadership development program that puts these
people in challenging situations and as members of cross-functional teams. A good develop-
ment program obtains feedback on these people’s performance as a leader from those who
see them in action.
Healthcare leaders suggest that some organizations getting into leadership development are
just going through the motions and not implementing a substantive program (Harvard Busi-
ness Publishing, 2016). However, several healthcare organizations, including the following,
have been recognized for their leadership development program via the National Center for
Healthcare Leadership (NCHL, 2020a) BOLD Awards:
• Centura Health
• Children’s Health System of Texas
• Children’s Hospital Los Angeles
RoosterHD/E+/Getty Images
There are considerable advantages to developing
leaders internally rather than hiring from outside.
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Section 2.3Developing and Evaluating Leaders
• Cleveland Clinic
• Cone Health
• Henry Ford Health System
• Intermountain Healthcare
• Tampa General Hospital
• University of Texas MD Anderson Cancer Center
• University of Pittsburgh Medical Center
Physicians are a critical source of leadership talent for healthcare organizations. In fact, some
healthcare organizations actively train physicians to assume leadership roles. For example,
Stanford School of Medicine and Stanford Hospital & Clinics offer a strong leadership devel-
opment program for faculty physicians. Each year, 25 to 30 participants are selected to par-
ticipate in training and projects that prepare them to lead small divisions, sections, or teams
in the academic medical center (Stanford School of Medicine, 2021).
Although there are advantages to promoting from within and signaling to current managers
that a career path in the company goes to the top, sometimes hiring a CEO from the outside
makes more sense. For instance, an HSO may require a transformational leader to shake up a
hierarchical system or to revitalize an organization that needs to expand into a new service
Hiring People With Leadership Potential
Hiring future leaders is not as easy as it sounds. Imagine you are interviewing people for a
middle management job, such as project manager for your clinic’s new electronic billing sys-
tem. The applicants could be qualified for the position, but how do you assess their leadership
There are a few things that almost every employer looks for in applicants when recruiting
potential leaders. Obvious indicators are experiences listed in their résumé in which they
made a difference. Having achieved something tangible is important, but just as important
is the way it was accomplished. Did the applicant lead the initiative, manage a group, or oth-
erwise demonstrate leadership qualities? References can provide information about what
the person was assigned to do and whether delivered results met or surpassed expectations.
They can also reveal whether teammates would work with that person again.
During the formal interview, some employers put applicants into various situations to see
how they respond. For leadership positions, applicants may be asked questions such as, How
do you motivate your staff ? Deal with poor performers? Handle patient complaints? Mock
situations used to elicit answers to these questions can provide insight into the applicant’s
leadership potential. These types of behavior-based interviews are common in healthcare
organizations. Candidates for a position are asked to recount specific situations in which they
have used behaviors or skills necessary to the position. For example, a person applying for a
management position may be asked to describe an incident that involved pressure to meet
a deadline and how they handled the situation (e.g., time management behavior). Applicants
may be asked to tell about a situation that involved talking with consumers or colleagues dur-
ing a difficult circumstance (e.g., communication skills).
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Section 2.3Developing and Evaluating Leaders
Finally, following the old adage It takes one to know one, several people currently in leadership
roles can interview applicants to provide a balanced and complete picture before hiring them.
By no means should all hiring decisions consider leadership potential. In healthcare organi-
zations, many positions do not require leadership competencies. One purpose of recruiting,
however, is to keep the potential leadership pipeline—the cadre of highly developed leaders
capable of filling slots in the organizational hierarchy—full.
Effective Leadership Development
Health systems with leadership development programs often start the programs to enhance
the organization’s strategic goals and succession planning. Although small HSOs may lack
internal resources to design and support ongoing leadership training programs, solutions
exist. Training consultants and vendors offer several learning products. For instance, the Har-
vard T. H. Chan School of Public Health (2021) Business School offers a course schedule and
leadership training programs that can be altered to suit to an HSO’s specific needs.
To complement more formal development programs, current leaders should model behav-
iors they expect potential leaders to emulate. Potential leaders should seek a mentor, either
in the same organization or outside it, to help their development. Some healthcare profes-
sional associations offer mentoring programs. For example, the American College of Health-
care Executives (ACHE, 2021c) offers a mentoring program for healthcare professionals at all
stages of their careers.
Leadership Development Pitfalls
Not all leadership development programs produce desired results. Some organizational lead-
ers have a control, ownership, and power mentality. This is characterized by a reluctance of
those in positions of authority to give up control, to relinquish ownership of resources, or
to share information. This leads to unenthusiastic or even zero cooperation with leadership
development programs.
Another pitfall is the productization of leadership development. This means creating a new
program based on the latest management fad or the magical new offering promoted by a lead-
ership training firm, without regard to whether it has anything to do with the organization’s
strategy or future needs. To make matters worse, in tough economic times, the program is
viewed as an unnecessary cost and is often curtailed.
The NCHL (2020b), a group dedicated to improving leadership development practices in
healthcare organizations, has identified 12 evidence-based best practices for leadership
development systems:
• strategically aligning leadership development
• attracting and selecting leaders
• preparing new leaders for success
• talent management and succession planning
• providing developmental experiences
• providing performance feedback
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Section 2.3Developing and Evaluating Leaders
• developing clinical leadership strength
• developing for diversity and inclusion
• incorporating administrative fellowships
• monitoring and achieving results
• utilizing coaching for leadership development
• leadership and well-being
An NCHL survey of 504 hospitals and 31 healthcare systems found that greater adoption of
five these best practices led to improved operating margins in HSOs. The five best practices
found to be associated with operating margins are attracting and selecting leaders, provid-
ing developmental experiences, providing performance feedback, monitoring and achieving
results, and developing for diversity and inclusion (Crowe et al., 2017; NCHL, 2013).
Evaluating Success
How can the success of leadership development programs be evaluated? Some organizations
make the mistake of applying the wrong metrics. It sounds great when the human resources
department delivers leadership training programs at lower-than-expected costs. Yet the cost
of the program is not the metric that counts. The value of leadership development programs
should be measured by answers to questions such as “Are we better able to fill key manage-
ment jobs when they arise?” or “To what extent are potential leaders knowledgeable about
and committed to our strategic direction?”
How investments in leadership development are integrated with the organization’s strategic
goals differs among HSOs. Experience has shown that more substantial returns are achieved
when the program is explicitly aligned to support organizational goals.
Leader Succession Planning
The complexity of healthcare today and the changes needed to reform and improve the health-
care system require skillful people in leadership positions. When there is turnover of senior
leaders, their successors must be prepared for the challenges ahead.
1. If you were asked to develop a score sheet for interviewing managerial candidates to
assess leadership potential, what would it look like?
2. Why do you think HSOs persist in hiring senior positions from the outside despite
research findings that people promoted from within do better and are less costly?
3. Are formal leadership development programs a cost or an investment? If the latter,
how might you calculate a return on that investment?
4. How can smaller HSOs implement evidence-based best practices for leadership
development systems?
5. How should an HSO develop potential leaders when it has no budget for leadership
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Section 2.3Developing and Evaluating Leaders
Succession planning is a process by which organizations continuously identify internal,
qualified candidates to assume vacant leadership positions. Succession planning, especially
at the top of an organization, is vital. It is too late to think about succession when a CEO or
other key senior leader resigns, even when the transition date is a few months away. The time
to think about succession planning is years before the actual event. In other words, it should
be done on an ongoing basis.
Good succession planning requires that a leadership pipeline be full at all times. This can be
challenging, especially for large hospitals and health systems.
To ensure that potential leaders and successors are being developed, leaders should establish
criteria for identifying talent throughout the healthcare organization. Standard terminology
is important so that everyone knows what is meant and what one is looking for and why.
Identifying promising candidates for leadership development should be organization-wide
and begin with recruiting.
In addition, a formal system must be in place to provide feedback about particular individu-
als after assignments are completed. These evaluations are used to help identify employees
best suited to a particular position from among all potential candidates. Finally, an aggressive
schedule of development opportunities should be devised to provide these people with maxi-
mum leadership growth. The multifaceted succession planning process at one healthcare sys-
tem is described in Case Study: Healthcare System Succession Planning.
Case Study: Healthcare System Succession Planning
After recently hiring a new CEO, the board of trustees at a small healthcare system in the
Southwest became concerned about the organization’s lack of a structured succession plan for
key leadership positions. The first step toward creating an effective organization-wide succes-
sion planning process was to implement the program in one functional area—nursing—which
included five levels of leadership.
A project team of nursing representatives started by identifying 10 competencies and defin-
ing behaviors for each leadership level. Next, all nursing leaders in the system were surveyed
about their short- and long-term career goals and leadership development needs. Armed with
the results, the project team had a better idea of the system’s leadership pipeline potential and
who might benefit from training.
Next, the team conducted capability review meetings with high-potential leadership devel-
opment candidates. Past performance was evaluated using standardized key organizational
metrics, and future potential was considered. Out of the more than 120 individuals invited to
capability review meetings, 23 potential candidates were identified, and 21 of them accepted
invitations to participate in the formal nursing leadership succession group.
People in the succession group are involved in action learning activities, project assignments,
and individual and team coaching. Participants have an individualized leadership develop-
ment plan that outlines their goals and action steps. This plan helps prepare them for promo-
tion when a leadership position becomes available.
(continued on next page)
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Section 2.4Governance and the Role of the Board of Directors
2.4 Governance and the Role of the Board of Directors
The American Hospital Association recognizes a number of types of HSOs, including for-
profit, religious nonprofit, other nonprofit, hospital district, and other government. A mix of
for-profit and nonprofit activities has long been found in the health services sector. Pharma-
ceutical and medical device companies have always been organized on a for-profit basis. Both
for-profit and nonprofit health insurance companies are common. Because hospitals origi-
nated and evolved as charitable institutions, organizations that provide healthcare services to
patients have traditionally been considered nonprofit. Since the enactment of Medicare in the
1960s, there has been growth in for-profit corporations as direct providers of health services.
Thousands of for-profit HSOs, owned by local investors who are often physicians, now pro-
vide healthcare services. These organizations range from large investor-owned hospital and
nursing home chains to smaller independent medical facilities, such as ambulatory surgery
centers, weight control clinics, urgent care centers, cardiopulmonary rehabilitation facilities,
and alcohol and drug abuse programs.
Yet despite these differences, the formal governance structures among HSOs are quite similar
and have not changed much in the past few decades. Most HSOs are organized as corporations,
Case Study: Healthcare System Succession Planning
Lessons learned from implementing the succession program in nursing are now being applied
to the creation of succession programs in other functional areas in the health system.
Questions for Critical Thinking and Engagement
1. What do you believe were the key factors in success for this leadership development
2. Would the plan be applicable to other types of healthcare professionals, such as
administrators or physicians? Why or why not?
1. When obtaining feedback on an individual already in a leadership development
program, whose feedback is more important—the person’s supervisor, peers, those
directly reporting to the individual, or consumers who interact with the individual?
2. What might be included in a feedback form to capture information useful in assess-
ing and developing someone’s leadership potential?
3. What principal elements of a potential leader’s performance in a leadership develop-
ment assignment should the organization look for?
4. Are formal succession programs a cost or an investment? If the latter, how might you
calculate a return on that investment?
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Section 2.4Governance and the Role of the Board of Directors
with governing boards that set strategies and oversee achievement of strategic objectives.
State and federal regulations governing for-profit and nonprofit HSOs influence board mem-
bership, oversight responsibilities, and board activities.
Governance of Nonprofits
A body of individuals known as the
board of directors (or trustees or
governing board) is responsible for
the conduct of an HSO. Understanding
the mission and vision as well as offer-
ing guidance and strategic thinking as
the organization looks to better meet
the needs of its community are at the
core of nonprofit governance. The
board employs senior leaders to man-
age the HSO’s day-to-day operations.
For hospitals, the board of directors
may include influential people in the
community, representatives of the
hospital-affiliated religious organiza-
tion, physician leaders of the medical
staff, and possibly representatives
from other healthcare corporations
and employers. Some district hospitals
are established as quasi-public agencies, with the board of directors publicly elected.
The Joint Commission (2021), an organization that accredits and certifies more than 22,000
U.S. healthcare organizations and programs, requires that organizations have a governing
body with overall responsibility for the conduct of the facility. The conditions of participation
for the federal Medicare program require that each hospital have
an effective governing body legally responsible for the conduct of the hospital
as an institution. If a hospital does not have an organized governing body, the
persons legally responsible for the conduct of the hospital must carry out the
functions . . . the governing body (or the persons legally responsible) must
include a member, or members, of the hospital’s medical staff. (Centers for
Medicare and Medicaid Services, 2012, p. 29074)
For some HSOs, federal or state regulations may have fairly strict board composition require-
ments. For example, nonprofit or public entities designated as federally qualified health
centers serving designated medically underserved populations/areas must be governed by
a community-based board of directors. Additionally, there are best practices for board size
and composition. According to the National Council of Nonprofits, an effective community
board consists of 13 to 17 individuals who represent the community in terms of demographic
factors such as race, ethnicity, and gender. It is important to have a majority of the board
members be consumers of healthcare and, in some instances, experience receiving care at the
SDI Productions/E+/Getty Images
In a hospital, the board of directors may include
physicians on the medical staff, individuals from the
larger community, and representatives of religious
organizations affiliated with the organization.
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Section 2.4Governance and the Role of the Board of Directors
Governance of public health departments is subject to state regulations. For instance, in Mis-
souri the county health departments operate under a board of trustees appointed by county
commissioners. North Dakota has 28 different public health units, each with governing bod-
ies. The Public Health Accreditation Board (PHAB) does not mandate a particular board
structure or membership but does encourage the governing entity to have legitimacy in the
tribal, state, or local government and have decision-making authority and influence with pub-
lic health departments.
Governance of For-Profits
For-profit HSOs also have a board of directors with responsibilities similar to boards in non-
profit HSOs and subject to the same state, Joint Commission, and Centers for Medicare and
Medicaid Services requirements. In for-profit HSOs, the owners of the corporation (i.e., pri-
vate investors or shareholders) elect the board of directors’ members. In many cases some of
the board members are also officers of the corporation. State corporate laws govern corpo-
rate board elections and reporting requirements.
For-profit HSOs that are subsidiaries of investor-owned healthcare systems or holding com-
panies have another layer of governance at the system level, where there is another board of
directors that oversees the organization and operation of the entire business. If the health-
care system is a public company—meaning that its shares are publicly traded on a U.S. stock
exchange—there is additional oversight by the U.S. Securities and Exchange Commission
(SEC) to ensure accurate and responsible financial reporting. The SEC (2021) requires public
companies to disclose various information to the public, with the intent to “protect investors,
maintain fair, orderly, and efficient markets, and facilitate capital formation” (para. 1).
The SEC requires public healthcare organizations to have a board of directors elected by the
shareholders at their annual meeting. The role of the board is to represent shareholder inter-
ests and oversee the strategic decisions that the CEO and management team take and, when
necessary, to reclaim decision-making power and make the crucial decisions itself.
Boards of directors of public HSOs are required by the SEC to have three standing committees,
outlined in Table 2.4, to help them fulfill their obligations.
Table 2.4: Standing committees required by the SEC
Committee Responsibilities
Audit Hires and reviews the performance of the independent public accountants
who audit the organization’s financial systems and reports; ensures the
integrity of the accounting practices and controls and reviews significant
changes in accounting policies
Compensation and
Determines compensation packages for the CEO, president, key top manag-
ers, and board members; oversees pension and other welfare policies for all
Nominating and Corporate
Reviews possible candidates for board membership and recommends nomi-
nees for election; oversees the process for performance evaluations of the
board and its committees; reviews the organization’s executive succession
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Section 2.4Governance and the Role of the Board of Directors
Sarbanes–Oxley Act of 2002
Reacting to the Enron Corporation financial scandal in 2002, the U.S. Congress passed Public
Law 107-204, also known as the Sarbanes–Oxley Act of 2002. Often shortened to SOX, the
Sarbanes–Oxley Act made internal control the direct responsibility of directors. For account-
ing crimes, SOX imposes large fines and prison sentences.
After the Sarbanes–Oxley Act was passed, the New York Stock Exchange and the American
Stock Exchange (now called the NYSE American) required independent directors to head
the major standing committees. Today boards of directors of companies trading on those
exchanges are required to have a majority of the board be independent and the audit commit-
tee be composed entirely of independent directors. Even so, in some cases, the CEO is power-
ful enough to offset the independence of the board. This is the reason that some companies
have an independent chair of the board who is not the CEO.
When first enacted, SOX seemed not to affect HSOs, especially those designated as charitable
organizations. Yet several sections are relevant. For instance, Title III, Section 302 requires
that the principal officers and financial officers sign the financial report, certify that the
report contains no false statements, and certify that the report is materially correct or face
stiff penalties. Today most boards in nonprofit hospitals and healthcare systems have an audit
committee with one member having financial expertise. This committee meets each year with
the HSO’s external auditor without senior management present.
Healthcare organizations are not immune from board liability concerns. Due to the SOX regu-
lations and higher levels of scrutiny on use of the healthcare dollar, many healthcare organi-
zations have added or bolstered compliance and ethics programming. Many of these compli-
ance programs focus on Medicare and insurance billing, since this has been of great concern
to the federal government.
For example, in late 2020 the federal government announced various illegal billing schemes
that totaled $6 billion over a multitude of organizations. For each allegation, there will be
an investigation from the governing board on down. The systems for information reporting,
internal audit and investigation, conflict of interest disclosure, and responding to complaints
will all be questioned (Minemyer, 2020).
Healthcare data privacy breaches are another area to which organizations are not immune. In
2019 Aveanna Healthcare and over 165,000 of its patients in Georgia fell victim to a phishing
attack. One hundred breach victims filed a lawsuit against Aveanna that referred to the orga-
nization’s delay in notifying individuals affected; practice of maintaining the data in vulner-
able systems, including email; and a lack of adequate monitoring of networks that would have
led to discovering the attack earlier (Davis, 2020).
While governing publicly traded and investor-owned healthcare organizations is compli-
cated, new regulations are making governance in all HSOs more challenging. In later chapters,
the strategic management process will be described in more detail in a manner that works
equally well in all types of HSOs. The emphasis will be placed on what the management team
must do to make and act on its strategic decisions. At the same time, the board plays a critical
role in overseeing and sometimes controlling what management does.
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Section 2.5Organizational Designs and the Role of Top Management
2.5 Organizational Designs and the Role of
Top Management
Organizational design is a major determinant of whether an HSO can effectively implement
its strategic objective through deployment of organizational resources. It entails dividing the
workforce into specific departments and jobs, identifying formal lines of authority, and creat-
ing mechanisms for coordinating organizational tasks. Strategy execution depends on com-
petent people who have the resources and the knowledge and who know what to do and how
their jobs relate to everyone else’s. Additionally, they require information where and when
they need it. How the HSO is staffed and organized becomes critical. Over time, as the HSO
grows, the difficulties of implementing the strategy increase. Organizational design in an HSO
must evolve as the HSO grows to become a multistate health system, expands its services,
acquires other HSOs, and so on. Details about executing strategies come later in the text. This
section introduces different kinds of organizational design, reasons each one is effective, and
their drawbacks.
Functional Organizational Design
The functional organizational design is a common design used in HSOs. Employees are
grouped according to discrete functional activities in the belief that work will be done more
efficiently. Top management and workers have a direct relationship. An example is a primary
care clinic. Registration employees are grouped with health record and billing employees.
Clinical staff members, such as medical technicians and nurses, are grouped together with
physicians and other practitioners, or the latter two may form a third grouping. By grouping
individuals, there is better communication and task execution. However, barriers that inhibit
organization-wide teamwork can form between groups. Figure 2.1 illustrates the functional
structure in a hypothetical physician hospital organization (PHO), an entity composed of phy-
sicians and one or more hospitals. A PHO is formed for the purpose of contracting with payers
and controlling costs.
1. What stakeholders are represented at the nonprofit hospital located nearest to you?
Why might it be challenging to find people willing to serve on a hospital governing
2. What are some ways in which a board of directors might maintain its independence
from management?
3. What is the role of the governing board in keeping organizations ethical?
4. What is the benefit of having a member of the hospital medical staff serve on the
hospital’s governing board?
5. Do you think SOX has been successful at increasing the financial transparency and
accountability of publicly traded healthcare organizations?
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Section 2.5Organizational Designs and the Role of Top Management
Figure 2.1: Functional organizational design in a physician hospital organization
The functional organization design in a physician hospital organization is formed for the purpose of
contracting with payers and controlling costs.
Functional organizational designs are variants of the following structure: At the top of the
hierarchy sit the board of directors and the CEO or president. In for-profit organizations,
this includes the chair of the board of directors and office of legal counsel. Below the CEO
may be several vice presidents responsible for one or more functional areas. Some HSOs
have a chief operating officer (COO) or executive vice president, who has the authority to
act as the CEO in the latter’s absence. That executive sometimes oversees the functional vice
presidents. Reporting to most vice presidents are C-level officers, with responsibilities for
their functional areas. Examples include the chief financial officer (CFO), chief nursing offi-
cer (CNO), chief medical officer (CMO), chief information officer (CIO), and chief compliance
officer (CCO).
The primary disadvantage of this form of organizational design is that it discourages horizon-
tal communication across functions. For example, a situation might arise in which the hospi-
tal nursing department identifies ways to improve patient safety with the purchase of a new
technology, but the finance department is not informed of this recommendation and funds
are not available for this purchase. To get around this problem, HSOs often form interdisci-
plinary committees composed of members from each affected functional area. Special project
teams might also be established to tackle one-time issues such as new federal regulations
dictating changes in information security practices. Interdisciplinary committees and project
teams are rarely full-time activities but rather must be done in addition to regular jobs and
It can be more difficult for HSOs with vertically organized functional units to create integrated
patient care programs at the service level to best meet patients’ needs. Nationwide health-
care reform efforts are requiring HSOs to adopt a more global view of healthcare processes.
Board of
Chief Executive
Chief Operating
Chief Medical
Marketing Finance Contracting
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Section 2.5Organizational Designs and the Role of Top Management
To meet these challenges, the organizational structure may need to change. HSOs with very
divided functional units in which there is little collaboration among professionals and more
attention to completing specific tasks will find it difficult to adapt. With the emergence of
value-based care arrangements, this interdisciplinary coordination has become ever more
important and could change the design of the healthcare organization into health centers
versus disease centers.
Divisional Organizational Design
Much like functional organizational designs, the divisional organizational design works
better for some HSOs than others. A divisional or market design is most effective when an
organization has a broad line of services that serve different markets. Figure 2.2 presents an
example of a hypothetical hospital with a divisional design. Jackson Memorial Health Care is
the parent corporation of Jackson Memorial Hospital and two additional community hospi-
tals, as well as the Jackson Memorial Foundation, which provides fund-raising support for the
hospital’s mission and strategic goals. Jackson Memorial Hospital has subdivisions represent-
ing its physician groups, healthcare services area, and outpatient services, among others.
Figure 2.2: Divisional organizational structure at Jackson Memorial Health Care
Jackson Memorial Health Care is a hypothetical hospital with a divisional organizational structure.
The divisions or subsidiaries are considered line departments, since they continue the chain
of command up to the CEO and overall board of directors. Staff departments such as human
resources, labor relations, finance, and legal counsel exist at the corporate office and serve
all divisions and subsidiaries. If the HSO does business outside the United States, an interna-
tional department coordinates the operations of divisions in different countries. Divisional
organizations, while simple in concept, can become complex as they grow and expand.
Health Care
Health Care
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Section 2.5Organizational Designs and the Role of Top Management
The test to determine whether a divisional organizational structure is the best choice for an
HSO is whether each division has somewhat different customers, competitors, or strategies
and therefore needs to be run by a separate director. The divisional structure provides an
opportunity for better attention to consumers’ needs with increased flexibility and quicker
reactions to changes in the market. This structure allows for enhanced coordination between
functional areas with opportunities for multidisciplinary input. The divisional structure,
nonetheless, has some weak points. Resources that are duplicated in each division can be
costly for the organization. There may be divisional rivalry for scarce resources, and a reluc-
tance to share can be problematic.
Matrix Organizational Design
A matrix organizational design is preferred when an organization provides a service or
product that requires strong internal coordination to the point that it is inefficient to organize
in divisions or departments. The matrix structure can be more flexible because employees in
different levels or departments in an organization can freely coordinate in teams versus hav-
ing to go through the chain of command between each departmental leadership structure.
Figure 2.3 illustrates a matrix organizational design for a hypothetical skilled nursing and
long-term care facility. The managers from the program and service areas and the functional
managers report directly to the CEO of the facility.
Figure 2.3: Matrix organizational design
In the matrix organizational design for a skilled nursing and long-term care facility, the managers
from the program and from the service areas and the functional managers report directly to the CEO
of the facility.
Functional Managers
Services Pharmacy
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Section 2.5Organizational Designs and the Role of Top Management
Healthcare managers often find the matrix structure attractive because it combines two main
objectives: It avoids duplication of resources and views the patient’s care from a global, rather
than segmented, perspective. But coordination costs may be high, and authority sharing can
be difficult. There is a functional manager for each department and different managers for
each program or service line. Employees are assigned to both functional and program or ser-
vice line areas—meaning they report to more than one manager.
Large multistate or national health systems may be organized in a matrix structure. The
organizational matrix could be two-dimensional; think of a spreadsheet in which service line
managers are column headings and state or country managers are row headings. The matrix
may even be three-dimensional with the third dimension being disciplines like physicians,
nurses, technicians, support staff, administrative staff, and so forth.
Choosing an Organizational Design
The best way to structure an organization is to adopt a design that is sufficiently flexible to
respond to strategic requirements while ensuring excellent internal coordination and com-
munication. For simplicity, only three organizational designs are described above, but there
are in fact several variations on these basic designs. Also keep in mind that the right structure
for today may be the wrong structure for tomorrow. During the internal assessment step of
strategic planning, leaders should examine the current organizational design to determine
whether changes are needed. Regardless of what type of design is adopted by an HSO, certain
minimal requirements should be considered.
• Have we created the fewest possible management levels and the shortest possible
chain of command?
• Does the design enhance rather than impede communication?
• Does the design expedite decision making to ensure achievement of strategic
• Are roles and responsibilities clear at all levels?
• Are resource duplication and loss of efficiency minimized?
• Do employees know where they belong in the organization and where their tasks fit
into the work of the organization?
• Are employees organized in a manner that encourages a sense of community and
• Does the organizational design facilitate the development of future leaders?
1. What is the organizational design at your place of employment or your school? What
are the advantages and drawbacks of its organizational design?
2. Describe how a small nonprofit HSO might change from a functional organizational
design to one that might better support a new for-profit health service product.
3. What organizational design would be best for public health departments? Why?
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Section 2.5Organizational Designs and the Role of Top Management
Role of Top Management
It is top management as a group that runs an organization under the guidance of the CEO.
Depending on the management style of the CEO, the relationship can be highly participative
and democratic, with strategic decisions made jointly. If the CEO is more dogmatic or auto-
cratic, top managers may be asked for input but are not directly involved in making strategic
Composition and Authority
The composition and authority of top
management varies according to orga-
nizational design. In a functional
design HSO, the top-management team
typically comprises all vice presidents
and C-level executives. In a divisional
design HSO, the top-management team
comprises key staff directors and all
divisional and subsidiary presidents.
In a matrix design HSO, the top-man-
agement team often includes the
department heads, key staff directors,
and sometimes managers of large and
critical programs.
The degree of decision-making author-
ity also varies with the organizational
design adopted. For example, in a functional HSO, vice presidents or C-level executives have
authority only in their functional area. A vice president of nursing services can decide tactical
questions only in patient care areas involving nurses. On the other hand, a divisional presi-
dent acts like a CEO within the division in question, overseeing all activities of the division.
Building Capability
Implementing a strategy involves more than just doing tasks that have always been done in
the same way as before. Strategy implementation over time becomes more demanding as
external challenges intensify. For that reason, top management must do more than simply
keep the organization running.
To build the necessary capabilities required for effective strategy implementation, the orga-
nization must continually recruit the kinds of people it needs and train others in newer sys-
tems, processes, and technologies. It must develop and keep full a pipeline of potential man-
agement and leadership talent that can fill higher level positions as they become available. It
must strive to develop a core competence if it doesn’t have one already or strengthen the one
it has. If it does not, the business will erode over time.
Top management must also be effective at evaluating and developing managers and supervi-
sors at lower levels. It becomes a top-management issue in larger HSOs where internal demand
for good managers and leaders is high and the positions varied. In such an organization,
xavierarnau/E+/Getty Images
The design of an organization has a strong influence
on the authority of top management.
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Section 2.5Organizational Designs and the Role of Top Management
potential leaders need to be cross-trained in different functional areas or different service
lines as they develop their problem-finding and problem-solving capabilities.
Evaluating Management and Leadership
The organization’s management and leadership capabilities affect its ability to achieve stra-
tegic goals. Thus, it is important that HSOs have a process for periodically evaluating those in
charge. C-level and vice president executives, middle managers, and supervisors are evalu-
ated individually by their immediate superiors, direct reports, and groups they have worked
with. The CEO and president are evaluated by the board of directors, usually with input from
their direct reports. The following are areas that should be included in any evaluation of an
HSO’s leadership.
• In what regard do their peers and direct reports hold them accountable? Does the
person command respect? Are they easy to approach and communicate with?
• How open are they to new ideas and new ways of doing things? Do they learn from
mistakes or tend to repeat them?
• What ethical standards and values do they espouse? Are they good role models,
leading by example?
• Do they put a high priority on developing the people they supervise? Are they good
motivators? Do the people they develop often get promoted?
• Are they critical and demanding—that is, do they have high standards and espouse
ambitious goals? Do they put the organization’s goals ahead of their own?
• Are they empathetic and compassionate?
1. Under what circumstances might an organization need an autocratic leader?
2. What steps might be taken if one or more members of the top-management team
were suspected of withholding information or pursuing a hidden personal agenda?
3. Members of the top-management team were appointed to their positions because
of their leadership and take-charge abilities yet must behave more like team play-
ers when helping make strategic decisions. How might such a seeming disparity be
4. As CEO of an HSO, how would you handle high turnover in your top-management
team? How could you or should you influence such change?
5. Would a top-management team at an HSO be better if its members had experiences
at other HSOs before having been promoted internally? Why or why not?
6. Is it possible for a top-management team to do a good job of assessing the state of its
own management and leadership? Why or why not?
7. Aside from its value as part of an internal assessment of the HSO, what other ben-
efits might accrue from a detailed assessment of the state of management and lead-
ership in the organization?
8. Do you believe management and leadership evaluations should be done annually?
Biannually? Once every 3 years? Give reasons for your answers.
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Section 2.6Organizational Values, Code of Conduct, and Culture
2.6 Organizational Values, Code of Conduct, and Culture
An organization’s stated values are an aspirational set of beliefs. Not all organizations state
their values, although there is a clear set of behavioral norms that the organization has
adopted to guide the way it works. Values guide the development of an organization’s code of
conduct and culture.
The Value of the Code of Conduct
According to a survey conducted by the Ethics Resource Center, 49% of U.S. employees
observed wrongdoing within their organizations (Ethics & Compliance Initiative, 2021d). We
can assume that public exposure of any of these incidents would erode consumer perceptions
of credibility and trust, which would be disastrous for the organization’s reputation.
To explain the behaviors desired by the organization beyond the set of values listed along-
side the mission and vision, many HSOs create a statement of expectations for professional
behavior, sometimes called a code of conduct. This became more common after the Joint Com-
mission issued new leadership standards in 2009 requiring the management of disruptive
behavior. Disruptive behavior encompasses any action that might reasonably be construed
by others as destructive or abusive to individuals, to healthy professional relationships in the
organization, or to operations. In addition to a statement that disruptive behavior will not be
tolerated, the code of conduct often includes definitions and examples of unacceptable behav-
ior, potential consequences, a method of reporting, and a statement that the organization will
not retaliate against employees who make good faith reports regarding potential violations
of laws, regulations, or policies.
The code of conduct should be as explicit as possible. The expectations laid out in the code of
conduct should be in concise and clear language. The code of conduct is more specific than
the value statements. Most importantly, everyone from the CEO on down should model the
beliefs and expected conduct set forth by the organization. People should be accountable not
only to the organization but also to themselves.
Organizational Culture
The values statement and code of conduct set forth what is expected of employees and in
turn what they can expect from the organization. The shared values contribute to the organi-
zational culture of a workplace. Much has been written about what organizational culture is.
Organizational culture is defined as “the set of shared attitudes, values, goals and practices
that characterizes an institution or organization” (Merriam-Webster, 2021).
Culture has the ability to enhance or impede the implementation of a particular strategy. Just
as form follows function, so also does structure follow strategy. Some organizational failures
can be traced to a new strategy being imposed on a culture that has not changed. In a non-
healthcare-related example, for years before General Motors went bankrupt, it resisted man-
ufacturing and selling smaller, more fuel-efficient cars primarily because executives’ bonuses
were still based on selling the large gas guzzlers that commanded high profit margins.
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Section 2.6Organizational Values, Code of Conduct, and Culture
Often, strategic changes that HSOs
undergo require the culture also to
change. For example, cardiac care pro-
viders at the Virginia Health system
adopted a shared-medical-appoint-
ment concept in which a cardiologist
sees patients in a group setting. As
many as 12 patients gather in a meeting
room, where each one is given a brief
physical exam by the cardiologist as
well as individual counseling and treat-
ment planning. The clinic’s patients are
given a choice between a one-on-one
appointment lasting 30 minutes or a
90-minute shared appointment. While
it might be thought that patients would
prefer more personal attention, the
interactive nature of the shared
appointments contributes to patients’
high satisfaction with their care during
group meetings (Wadsworth et al.,
2019). This strategic change also
required a change in the clinic’s culture
to a more collaborative, team-based, patient-centered experience. In the one-on-one model,
physicians take notes during the appointment. In the shared appointment model, a nurse
attends the sessions and does the note-taking directly into a computer.
Unless done carefully, people in organizations, and especially cultures that have evolved over
time, resist change. The way to succeed is to get those who must change involved in the change
process from the beginning. They should be told what the problem is or why the change is
necessary and be given an opportunity to develop solutions. Any change forced on them will
produce resistance, either overt or tacit. The change process should be planned carefully with
participation by all affected. Implementation should take place in stages and be accompanied
by necessary education or training and support. The process may be smoothed with the assis-
tance of a skilled consultant.
The extent to which a strategic alternative fits with the existing corporate culture and the
extent to which a company’s culture might be required to change are key criteria in choos-
ing the best strategy. Changing the culture is very difficult to do, and this should be consid-
ered when making strategic choices. This is discussed in Chapter 6 when we consider how to
decide which of several strategic alternative choices to adopt.
Hispanolistic/E+/Getty Images
A strategic change might require a change in
culture. For example, a collaborative approach to
patient treatment requires a high level of teamwork
among caregivers.
1. What role do the professionalism standards and code of conduct play in an organiza-
tion achieving its mission, vision, and values?
(continued on next page)
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Section 2.7Managing Organizational Change
2.7 Managing Organizational Change
Change management is “a systematic approach to dealing with change, both from the per-
spective of an organization and on the individual level . . . proactively addressing adapting to
change, controlling change, and effecting change” (Change-Management-Coach.Com, 2021,
para. 18). It is “the coordination of a structured period of transition from situation A to situa-
tion B in order to achieve lasting change within an organization” (Change-Management-Coach.
Com, 2021, para. 11). These are two of many definitions; together, they effectively define a
complex process. Additionally, there is planned and unplanned change. Planned change may
include deploying a new value-based care system or upgrading an electronic medical record.
Unplanned change could relate to a significant external event such as a hurricane or a pan-
demic such as COVID-19.
To succeed in an environment of almost constant change, HSOs must embrace change. Manag-
ing such continual change is difficult but necessary. Merely reacting to changes as they occur
is not enough. Organizations must be proactive to flourish and survive long term.
Staying Ahead of Change
Steering an organization to be successful over time—the purpose of strategic management—
necessarily requires some organizational changes. Any change, no matter how small, poses a
threat to the status quo and creates immediate resistance. The changes required for achieving
strategic objectives can affect every aspect of organizational life—structure, culture, account-
ability systems, work groups, professional hierarchy, and so on. Vital processes such as com-
munication, motivation, and leadership are often affected.
The more urgent motivation for change stems from a strategic consideration. An HSO might
need to install a new EHR system, start a new service line, enter into a joint venture with
another HSO, partner with other providers to create an accountable care organization, or
take other actions necessary to maintain market share and a consistent revenue stream. In
such cases, the status quo is not an option; change is inevitable. Unless handled properly,
D I S C U S S I O NQ U E S T I O N S(continued)
2. What would you do—indeed, what can you do—if you notice someone in the organi-
zation violating a professional code of conduct?
3. How can you ensure that all employees understand and accept the organization’s
values statement and code of conduct?
4. How might an HSO realize that its culture is the reason its strategies are not work-
ing? If you worked in this HSO and noticed this issue, what would you do?
5. If an HSO needs to change its culture, what impact would the following have on
culture change: replacing people who adhere to the old way of doing things, rede-
signing the structure of the organization, or initiating an organization-wide culture
change process?
© 2022 Zovio, Inc. All rights reserved. Not for resale or redistribution.
Section 2.7Managing Organizational Change
resistance—both passive and active—will derail important strategic initiatives. That is why
organizations must learn how to manage change effectively.
Organizations that are considered high performers that undergo constant change seek to
become proficient at managing change. High-performing organizations have learned through
experience how to identify and achieve goals through participative discussions that lead to
enthusiastic pursuit of changes by everyone involved. Forcing something on people without
their input and involvement will be met with resistance, thereby jeopardizing the change pro-
cess or even preventing it.
Implementing Change
Managers introduce and implement change from either the top down or the bottom up. At
times, change can be cocreated.
Top-down change is autocratic—the need for change and how it is to be implemented is
decided at the top of the organization and relayed to those lower in the hierarchy to imple-
ment. Top-down change is valuable when the organization must act quickly and decisively. It
is typically initiated by the CEO. This approach works because managers at each level of the
hierarchy have the authority to tell their staff what to do and what results are expected. For
example, prior to the mid-1990s, the Veterans Health Administration (VA) system was widely
recognized as an autocratic, top-down-style HSO with little decision-making involvement
by staff members and physicians. Although the VA system has undergone some structural
changes with a more regional approach, the militaristic, top-down style of leadership still
persists in some areas.
Bottom-up change is more gradual,
complex, and evolutionary, but no less
effective. More than top-down change,
it gets everyone involved, confirming
to employees that top management is
listening to their ideas and sometimes
acting on them. This sense of being a
participant in the process minimizes
resistance to change. Who else is in a
better position to see the need for
change or how something can be done
better or more efficiently than front-
line staff members? Bottom-up change
can originate anywhere in the organi-
zation. For example, hospitals that
have adopted a model of nursing
shared governance have a formal
structure that provides staff nurses
with a way to communicate concerns and work toward mutually beneficial solutions. All
nurses have an equal voice.
Cocreated change involves distributive leadership. Instead of top leaders being in charge
and pushing change onto people at the lower levels, cocreated change involves people at all
katleho Seisa/E+/Getty Images
Unless change needs to be immediate, it is often
best to use a bottom-up or cocreated approach to
implement change.
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Section 2.7Managing Organizational Change
levels of the organization. Rather than leaders looking for ways to get people to buy in to stra-
tegic goals, multilevel leadership involving managers and staff members generates the goal
of change. People at the middle levels and lower resolve local barriers, and top leaders clear
away strategic barriers. Cocreated change was needed to respond to the COVID-19 pandemic
at Mount Sinai to free up much-needed beds during the initial surge of hospitalization in
New York City. Top leaders as well as those most affected by the changes worked together to
expand the program (Association of American Medical Colleges, 2020). Adapting to COVID-19
required swift unplanned change, which cocreated change can be helpful in facilitating.
Change efforts must be carefully managed; otherwise, the hoped-for results will not be
achieved. Case Study: Hospital Nursing Department Change Effort Gone Awry illustrates a
failed change effort and describes what contributed to this disappointment.
Case Study: Hospital Nursing Department Change Effort
Gone Awry
The nursing education director in a midsize hospital came up with a great idea. Bedside nurses
spend a lot of their time in face-to-face group meetings, which take them away from patient
care duties. The director proposed using electronic message boards, blogs, and wikis to reduce
the need for group meetings. Using these media would allow nurses to complete some group
work during their downtime rather than leaving units to attend formal meetings. This change
would potentially help nurses be more productive at the bedside and improve the way they get
their work done. The electronic message boards could also be used to update all nurses on the
work of various committees and share evidence-based practice recommendations.
The idea was presented to the nursing shared leadership committee, where it was received
with a lot of enthusiasm. Once the information technology (IT) department set up servers
to run the message boards securely, the change effort was off and running. Electronic mes-
sage boards were set up for each unit, and nurses were taught how to use the media and its
purpose. Blogging capabilities were to be implemented once staff members got used to the
message boards.
What seemed like a great idea did not catch on with the bedside nurses. Making this com-
munication tool available was not enough to get people to access the board to interact with
one another. The value of using the message boards for communication was unclear to people
at the grassroots level, and face-to-face meetings had been their usual way of interacting for
years. The committee chairs, charge nurses, and clinical leaders were not made responsible
for regularly posting content on the message boards. The staff nurses quickly stopped logging
in to the message boards when they found little to read.
This change effort failed for several reasons. First, and most important, it was initiated with
a top-down approach. The idea hadn’t originated with the bedside nurses. While it may have
been a great idea, the people being asked to change were not involved in the initial strategic
decision. Bedside nurses were not asked to help design the message boards or identify content
that would be relevant for posting on the boards. There was no effort to obtain buy-in from
staff nurses—the idea was pushed down from the upper levels of the nursing department. The
goal of leadership was to improve nurse productivity at the bedside and enhance departmen-
tal communication. Whether the frontline staff considered these to be important goals was
never fully explored before implementation of the change.
(continued on next page)
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Summary & Resources
Whatever change tactic is employed, a high degree of communication and coordination among
all organizational units is needed. For instance, primary care clinics implementing an EHR
system will need to coordinate with call centers, care coordinators, billing systems, and other
functional areas. All activities related to the adoption of the electronic health record must be
coordinated, as must all other strategic changes occurring at the same time.
Summary & Resources
Chapter Summary
• An understanding of the human side of corporations is essential to managing stra-
tegically. Strategic planning and strategic management are the principal drivers of
• Leaders create change; managers implement change. Both are responsible for
getting things done, but leaders see where changes are needed and the direction
in which the company should go. Organizations sponsor leadership development
programs to identify, cultivate, and evaluate potential leaders and ensure that people
will be available to fill vacant leadership roles.
Case Study: Hospital Nursing Department Change Effort
Gone Awry (continued)
Questions for Critical Thinking and Engagement
1. When people are being asked to change the way they have always done things,
unless the change is urgently needed, a bottom-up or cocreated approach is more
likely to be successful. Why do you think this is so?
2. What might have been a better method of implementing change in this scenario?
1. You are in charge of a small home health agency and want to institute many changes.
Which approach—the top-down, bottom-up, or cocreated change approach—do you
feel would work better than the others and why?
2. A hospital is considering whether to install expensive robotic surgery equipment.
Top management and senior medical staff leadership want to do this because of the
potential for increased market share, but the plant engineering department says the
difficulties of doing this are huge and it should not be done. What might be a way out
of this impasse?
3. Your organization has decided to change to a shared leadership model with more
grassroots involvement in strategic decisions. How can leaders convince employees
their input is valued?
© 2022 Zovio, Inc. All rights reserved. Not for resale or redistribution.
Summary & Resources
• A leader’s power derives from legitimate authority by virtue of their position in the
organization; specialized knowledge, respect, and charisma; the ability to give or
withhold rewards; and the ability to reprimand or fire. Strategic leaders are most
concerned with the long-term survival and success of the whole organization.
• Organizations are governed by CEOs and their top-management teams. Most health-
care organizations, both for-profit and nonprofit, are organized as corporations with
a board of directors. Boards are composed of inside members (e.g., the CEO, key
executives, and physicians), related outsiders, and independent members. The board
members and senior management in all healthcare organizations have more strin-
gent oversight responsibilities as a result of the Sarbanes–Oxley Act of 2002.
• As an HSO evolves and expands, structure follows strategy. Unless the HSO is orga-
nized appropriately, it will not be able to execute its strategies effectively. There are
three basic forms of organizational design. Functional organization is the most com-
mon for HSOs, although divisional organization is becoming more common because
of the growth in mergers and joint ventures. A matrix organization may be suitable
when an HSO has several unique programs or services or conducts business in sev-
eral locations.
• Besides the CEO and president, top-management teams in a functional organiza-
tional design typically consist of all vice presidents and C-level officers. In a divi-
sional organization, key staff directors and all divisional and subsidiary presidents
are members of the management team. In a matrix organization, top manage-
ment includes department heads and key staff directors. Top-management teams
are involved in strategic planning and making strategic decisions for the whole
• How people behave in an HSO and how they interact with one another and consum-
ers is of the utmost importance. The organization has to treat people fairly and moti-
vate them to be good and to do good. Thus, promoting explicit desired values and a
code of conduct and modeling them are critical. A culture based on good values and
professional behavior will endure, because it attracts employees and physicians who
share these values.
• Strategic transitions within an HSO can necessitate many organizational and func-
tional changes, and these need to be managed well. The single biggest mistake is not
giving those most affected by the change an opportunity to participate in making the
change. Excluding frontline staff members and physicians from the process leads to
both passive and overt resistance. This resistance makes the change process more
challenging and costlier and even impossible.
• Sometimes change is dictated from the top down. This is particularly true if the issue
is urgent, because top-down change can be implemented rapidly. Bottom-up changes
take longer but involve those most affected by the change, thus minimizing resis-
tance and increasing the chances of successful implementation. Cocreated change is
ideal because it reinforces the importance of active involvement of both leadership
and frontline workers.
Critical Thinking and Analytical Exercises
1. Explore service leadership in a leader you admire or past Kaiser Permanente CEO
Bernard Tyson. What are some examples that you can point to that showcase their
servant leadership?
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Summary & Resources
2. In reviewing Chapters 1 and 2, what would you look for if you were recruiting the
Mayo Clinic board of directors and why?
3. Compare the mission, vision, and values of a nonprofit and for-profit healthcare
organization. Where are they similar, and where do they differ? Do you believe the
differences relate to their for-profit or nonprofit status? Explain your reasoning.
4. Find a new example that is not covered in this text of a healthcare organization’s
mission, vision, and values. How do they compare against the best practices noted in
the chapter? Do you have suggestions for improvement?
5. With the emergence of COVID-19, what type of changes in healthcare have you
noticed? What type of change management models would have been helpful for the
change process and why?
Web Resources
The Governance Institute provides a number of resources for healthcare leaders and board
This National Council of Nonprofits site lists a variety of considerations in board size and


The website of the National Center for Healthcare Leadership has several resources on effec-
tive healthcare management leaders, including presentations, publications, white papers, and


The voluntary accreditation standards for public health entities and related resources are
available on the website of the Public Health Accreditation Board.
The Health Care Compliance Association site offers resources related to changing regulations,
compliance, and ethics in healthcare.
Key Terms
board of directors An appointed or
elected group of people that has the legal
responsibility for overall management of an
bottom-up change A change process that
can begin with anyone in the organization
(and need not travel upward more than one
or two levels), gets results gradually over
time, and involves employees, thus minimiz-
ing their resistance to change.
change management A structured
approach to shifting or transitioning indi-
viduals, teams, and organizations from a
current state to a desired future state. It is
an organizational process aimed at empow-
ering employees to accept and embrace
changes in their current work environment.
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Summary & Resources
C-level officers Executives who are on
par with or report to vice presidents in
the organizational hierarchy. C-level refers
to the chief financial officer (CFO), chief
nursing officer (CNO), chief medical officer
(CMO), chief information officer (CIO), chief
compliance officer (CCO), and so on.
cocreated change A change process that
involves distributed leadership at all levels
of the organization.
customer value proposition A descrip-
tion of the value a customer will experience
when purchasing and using a product or
divisional organizational design A design
that is most common in diversified organi-
zations, where each division or subsidiary
has its own president and functional organi-
zation but reports up the chain of command
to the CEO.
functional organizational design A
design that groups employees together
according to discrete functional activities in
the belief that this will enable the work to
be done more effectively.
leader Anyone who can visualize a better
state of affairs and can induce and guide
others to achieve change.
leadership pipeline A cadre of highly
developed potential leaders capable of fill-
ing slots in the organizational hierarchy as
and when they become vacant; ideally, this
pipeline should be full at all times.
manager Someone who gets work done
through others.
matrix organizational design A design
with both vertical (i.e., skills or disciplines)
and horizontal (e.g., projects, distinct
brands or product lines, or countries)
chains of command.
mission statement A concise statement of
an organization’s reason for being: its pur-
pose, what it actually does, and for whom.
organizational culture The set of shared
attitudes, values, goals, and practices that
characterizes an institution or organization.
organizational design The deployment
of organizational resources focused on
employees and teams. It entails dividing
the workforce into levels of authority and
establishing decision-making rights, orga-
nizing specific departments and jobs, and
creating mechanisms for coordinating orga-
nizational tasks.
public company A company whose shares
can be publicly traded on a U.S. stock
exchange and that is regulated by the SEC to
ensure accurate and responsible financial
Sarbanes–Oxley Act (SOX) An act passed
by the U.S. Congress in 2002 that strength-
ened the role of corporate boards and
governance in protecting investors from
fraudulent accounting practices. The act
improved the transparency and integrity of
financial statements.
servant leadership The leadership philos-
ophy that an organization and individuals
are at their best when people are inspired
and have learning and coaching opportuni-
ties. Servant leaders believe they are there
to inspire people to problem solve and
coach individuals to unleash talent.
strategic leadership An approach to lead-
ership that involves creating a vision and
strategy that, in both the short and the long
term, help the organization succeed.
succession planning An essential pro-
cess by which organizations continuously
identify internal, qualified candidates who
are available to assume vacant leadership
© 2022 Zovio, Inc. All rights reserved. Not for resale or redistribution.
Summary & Resources
top management The group responsible
for running an organization; typically com-
prises all the vice presidents and C-level
executives in a functional organization,
the department heads and key staff direc-
tors in a matrix organization, and key staff
directors and all divisional and subsidiary
presidents in a divisional organization.
top-down change Change initiated by the
CEO when the organization needs to act
quickly and decisively.
transactional leadership A leadership
philosophy that relies on hierarchical struc-
tures and relationships of mutual depen-
dences in which the contributions of each
party are recognized and, often, goals are
met and rewards delivered.
U.S. Securities and Exchange Commission
(SEC) A federal agency that holds primary
responsibility for enforcing the federal
securities laws and regulating the securi-
ties industry, the nation’s stock and options
exchanges, and other electronic securities
markets in the United States.
value statement A concise set of beliefs
and desired behaviors that guide culture,
decision making, and prioritization in an
vision statement A concise statement of
where the organization would like to see
itself 5 or 10 years (sometimes longer) in
the future.
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Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

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Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

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