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Article Excerpt
Over the past several decades, large, complex multibusiness health care firms, more commonly known as organized or integrated delivery systems, have formed primarily through related horizontal and vertical scope expansions across the health care value chain (Robinson 1996; Gaynor and Haas-Wilson 1999; Bazzoli et al. 2001; Friedman and Goes 2001; Burns and Pauly 2002; Luke, Walston, and Plummer 2004). The health care value chain consists of patient care and nonpatient care businesses. Patient care businesses include ambulatory, acute, subacute, and home health care offered in different settings such as physician offices, hospitals, skilled nursing facilities, nursing homes, and patient homes. Nonpatient care businesses contain a myriad of ventures such as pharmacies, laboratories, and medical devices. Such firms, therefore, exhibit considerable product/market diversity in their scope of business activities.
Prior research by Bazzoli et al. (1999) and Dubbs et al. (2004) empirically derived a taxonomy to define and quantify what previously appeared to be a chaotic evolution of new health care organizational forms. They classified 575 multibusiness hospital systems and networks into nine distinct clusters based on three strategic/structural dimensions: differentiation, representing the number of products/services along the continuum of care; integration, mechanisms to align and coordinate care across different businesses; and centralization, extent to which activities take place at centralized locations. They found organizations in each cluster had similar strategic and structural orientation and concluded that important and meaningful similarities exist across many evolving organizations (Bazzoli et al. 1999).
This article contributes to prior research in two important ways. First, scope akin to the differentiation dimension in Bazzoli et al. (1999) is used to empirically derive a taxonomy representing corporate strategies of multibusiness health care firms. Corporate strategy evolves over an extended period of time as a complex pattern of choices, which makes direct observation and measurement of corporate strategy difficult. However, prior research has shown that scope, defined as the breadth and type of distinct businesses in which a firm chooses to compete, is central to a firm's corporate strategy (Andrews 1971; Rumelt 1974; Chandler 1990; Collis and Montgomery 1998; Ghemawat 2003; Harrigan 2003). Scope is a strong, measurable indicator of a firm's corporate strategy because it encompasses choices with regard to horizontal integration, vertical integration, and geographic location. Therefore, this study utilizes scope to measure corporate strategy in order to answer two research questions: (1) Can we identify a small number of distinct and mutually exclusive corporate strategies characterizing a large number of multibusiness health care firms? (2) Do significant differences in financial performance exist among these corporate strategies?
The second extension is the use of a new dataset obtained from HIMSS Analytics Database (derived from the Dorenfest IHDS+Database[TM]) that enabled the measurement of scope of 796 multibusiness health care firms nationwide for the year 2000. This novel dataset provides more complete information on the types, breadth, and size of businesses owned by each firm across the health care value chain when compared with the American Hospital Association (AHA) data used in the Bazzoli et al. (1999) and Dubbs et al. (2004) studies. The data also contain information on ownership of nonpatient care businesses and on collaborations with other firms not available in the AHA data. HIMSS Analytics collects the scope and financial data at the corporate level, thereby allowing the unit of analysis to be the entire multibusiness firm, not the subunit hospital level as in prior studies. This higher level of analysis and more complete data on firm scope makes it possible, for the first time, to empirically derive a taxonomy of corporate strategies and relate them to financial performance.
Bazzoli et al. (1999) noted, "the need to undertake research that categorizes and classifies newly emerging health care organizations is immense." At this preliminary stage, the development of a taxonomy of corporate strategies based on scope is a way by which research into and theory relating to multibusiness health care firms can be advanced. Research is advanced by examining, for the first time, the types of businesses comprising these evolving organizational forms. Theories of organizational configurations and strategic management are applied to determine whether competitive dimensions of scope might enable clear distinctions to be drawn across groups of firms with implications for strategy and financial performance.
This article is organized into five sections: (1) conceptual framework, (2) research methodology and classification procedure, (3) results, (4) relationship between corporate strategy and financial performance, and (5) discussion of the results.
THEORETICAL FRAMEWORK
An effective corporate strategy is a set of choices, either implicit or explicit, around the dimensions of scope, ownership, and organizational design that are configured with a company's resources to generate sustainable competitive advantage (Anand 2005). This definition highlights key elements comprising the theoretical framework of corporate strategy including ownership form, organizational design, scope, configuration, and competitive advantage. Ownership form is concerned with whether to use the market, hierarchy (full ownership), or alternative arrangements, such as alliances, joint ventures, to set firm boundaries (Coase 1937; Williamson 1985; Hart and Moore 1990; Holmstrom and Roberts 1998). Organizational design involves the processes and systems that serve as integrative mechanisms among the separate business units including information rights (Arrow 1975), allocation of decision rights (Jensen and Meckling 1994), information systems, and management control systems (Kaplan and Norton 1996; Simons 2005). Scope is the breadth and type of businesses in which a firm chooses to compete. Scope includes choices with regard to horizontal integration (product markets), vertical integration (stage of production), and geographic location (local, national, or global). Decisions about scope are central to a firm's corporate strategy, determining the firm's size, the product markets in which it competes, and the relatedness among its business units (Rumelt 1974; Chandler 1990; Ghemawat 2003; Harrigan 2003).
In the past two decades, a significant part of a multibusiness health care firm's corporate strategy involved horizontal and vertical scope expansion and configuration across the health care value chain (Robinson 1996; Gaynor and Haas-Wilson 1999; Coddington et al. 2000; Shortell et al. 2000; Bazzoli et al. 2001; Friedman and Goes 2001). Emphasis was placed on scope because executives believed owning a combination of businesses would confer competitive advantage in the form of increased efficiency, access, referrals, and market power (Burns and Pauly 2002). Therefore, in this study, scope is used to represent corporate strategy. As shown in Figure 1, seven separate business areas are identified from prior research and industry sources to measure scope (Shortell, Gillies, and Anderson 1994; HIMSS Analytics 2000): (1) health plans, (2) ambulatory care including clinics, physician practices, and physician group affiliations, (3) acute care, (4) subacute care including long-term, skilled nursing, behavioral health, psychiatric, and rehabilitative services, (5) home health care, (6) other related nonpatient care businesses (e.g., laboratories, pharmacies, and fitness centers), and (7) collaborations with other firms (e.g., joint ventures, alliances, and partnerships).
Scope is used to measure corporate strategy by applying existing theory on organizational configurations. Organizational configurations are defined as groups of firms sharing a common profile along conceptually distinct characteristics such as strategy, structure, and processes (Miller, Friesen, and Mintzberg 1984; Ketchen, Thomas, and Snow 1993; Ferguson and Ketchen 1999). There are four premises underlying the theory on organizational configurations. First, organizations are complex entities whose elements of strategy, structure, and processes have a natural tendency to coalesce into similar groups or configurations composed of interdependent and mutually supportive relationships. Second, a relatively small number of these configurations encompass a large fraction of organizations. Third, the small number of configurations will exhibit distinct internal complementarities or "fit" among strategic, structural, and process variables from which can be developed conceptual typologies or empirical taxonomies. Fourth, these configurations tend to be stable because the strong interdependencies among the strategy, structure, and process variables are complementary and require simultaneous change of many interrelationships in...
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