Answer the following question with regards to Rashid Hospital in Dubai.

 

1. Select two most appropriate characteristics against which you can map strategic groups in your service area (e.g. price, product differentiation, Research and Development, patient cantered care, continuity of care, etc) and explain why did you choose those characteristics

2. After reading the research article “Understanding competitive advantage in the general hospital industry: evaluating strategic competencies”. What is the association between Strategic competencies and hospital financial performance? from your point of view, does the association revealed in the study seems logic? (look at the attachments)

3. Give your suggestions for adding value in any selected Integrated Practice Unit (medical condition).

 

Strategic Management Journal

Strat. Mgmt. J., 24: 333–347 (2003)

Published online 20 January 2003 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.301

UNDERSTANDING COMPETITIVE ADVANTAGE IN

THE GENERAL HOSPITAL INDUSTRY: EVALUATING

STRATEGIC COMPETENCIES

THOMAS J. DOUGLAS1 and JOEL A. RYMAN2*

1 Department of Management, Clemson University, Clemson, South Carolina, U.S.A.

2 Cameron School of Business, University of North Carolina at Wilmington,

Wilmington, North Carolina, U.S.A.

This study examines the drivers of competitive advantage within the hospital industry. Specifically,

we examine both the direct and joint effects of market structure, firm-level competencies,

and interorganizational relationships on organizational performance. The results of this approach

indicated that managers, through their strategic actions related to the capabilities and relationships

they develop and deploy, can establish advantageous competitive positions and influence the

negative effects of market structure by developing important strategic competencies. Copyright

? 2003 John Wiley & Sons, Ltd.

During the 1990s a number of works appeared in

the strategic management literature that reviewed

the development of this field of study. Each offered

insightful suggestions concerning its future directions

(e.g., Hoskisson et al., 1999; McGahan and

Porter, 1997; Porter, 1991; Rumelt, Schendel, and

Teece, 1994). The authors called attention to the

importance of both external and internal environments

to organizations and the potential for success

or failure of firms based on the decisions made by

senior executives in dealing with positioning the

firm in its industry.

Porter (1991) identified two key components of

firm success as industry structure and firm core

competencies. Thus, a firm must not only develop

competencies that allow it to successfully position

itself within its industry, but a firm must also be

active with respect to ‘influencing industry structure’

(Porter, 1991: 101). Hoskisson et al. (1999)

reviewed both the I/O theory focusing on industry

structure (Bain, 1959) and the resource-based view

Key words: resource-based view; I/O economic; relational

view; competitive advantage; hospital industry

*Correspondence to: Joel A. Ryman, Cameron School of Business,

The University of North Carolina, 601 South College Road,

Wilmington, NC 28403-3297, U.S.A.

(RBV) of the firm (Penrose, 1959; Barney, 1991;

Wernerfelt, 1984), stating that, while these theories

are the cornerstones of future research in strategic

management, few studies have accomplished the

integration of the two.

One complementary concept to both the external

and internal venues that may help explain

today’s complex relationships is that of ‘cooperative

strategies,’ first introduced by Thompson

(1967). While the RBV focuses on the use of

internal organizational resources and capabilities

(Barney, 1991) to achieve competitive advantage

in a selected environment, it doesn’t consider the

use of strategic alliances that allow the combining

of resources across organizational boundaries in

pursuit of competitive advantage. Recently, Dyer

and Singh (1998) presented the relational view,

which incorporates the concept of resources shared

across cooperating or networked organizations.

These combined resources are potential sources of

competitive advantage and aid a firm seeking an

effective position in its industry.

The purpose of our research is to evaluate

the ability of firms to select and use valuecreating

internal and shared resources to gain competitive

advantage and to mitigate the pressures

Copyright ? 2003 John Wiley & Sons, Ltd. Received 28 January 2001

Final revision received 7 October 2002

334 T. J. Douglas and J. A. Ryman

that industry structure puts on firm profitability.

According to Priem and Butler (2001), studies

that utilize this type of contingency approach are

important in order to clarify the role and contributions

of the RBV and to inform practitioners

concerning resource decisions. Since the value

of resources is directly related to industry and

market (Amit and Schoemaker, 1993; Combs and

Ketchen, 1999), it is important to focus on a

single industry (Hoskisson et al., 1999). We use

the general hospital industry since the health care

field represents many unique markets, maintains

detailed data, and continues to undergo significant

change, making it a ‘fertile ground for testing

theory’ (Dranove and White, 1994). In studying

the hospital industry, we will use concepts

from the I/O economic, resource-based, and relational

views.

THEORETICAL DEVELOPMENT

Industry structure

Important to an understanding of competitive advantage

in the hospital industry is an evaluation

of its industry environment. Each hospital should

consider the relevant industry forces as it positions

itself competitively and evaluates the resources

and capabilities necessary to achieve competitive

advantage. Much work has been completed in this

area in both the economic and strategy literatures.

Hoskisson et al. (1999) identified one of the

most significant theoretical contributions to strategic

management literature as the incorporation of

industrial organization economics, primarily the

structure–conduct–performance (SCP) paradigm.

According to this important I/O economic model,

a firm’s performance is related to the strength

of forces that define the structure of the industry

environment. Building on the foundational work

of Bain (1959), Mason (1939), and others, Porter

(1980) introduced the five forces model, which

provided an important conceptual framework for

understanding and analyzing the various effects of

industry structure on the profit potential of firms

within an industry.

A number of empirical studies have added to our

knowledge of the significance of the relationship

between industry structure and firm performance

(Schmalensee, 1985; Rumelt, 1991). Especially

pertinent to our study of hospitals, McGahan and

Porter (1997) found that the portion of variance in

business unit performance explained by industry

effects was larger for service industries than for

manufacturing industries.

With respect to the general hospital industry,

major changes in its structure have occurred in

recent decades. Managed care, introduced in the

early 1980s as a way to address the exploding

growth in health care expenditures, has encouraged

the creation of large purchasers of health

care services who then coordinate with hospitals

and other relevant organizations (Teisberg,

Porter, and Brown, 1994). Consequently, managed

care has had a profound impact on the structure

of the health care industry as these empowered

health care buyers have stimulated intense

competition with and between hospitals. Scholars

have described and studied significant changes in

the make-up and power of the payers of health

care services (Dranove and White, 1994; Dranove,

Simon, and White, 1998; Ozcan and Luke, 1993),

in the level of competition within the local markets

(Dranove, Shanley, and Simon, 1992; Manheim,

Bazzoli, and Sohn, 1994), and in the degree of

partnering with inter- and intra-industry organizations

(Burns et al., 2000; Dranove and Shanley,

1995; Luke, Ozcan, and Olden, 1995). Managed

care and hospital rivalry are the two primary competitive

forces that are transforming the structure

of the health care industry and having a significant

impact on the profitability of hospitals. Therefore,

we will explore in more detail the impact of these

competitive forces.

Managed care buyer power

Managed care has been defined on a broad basis as

the organized efforts that began in the early 1980s

to control costs (Burns et al., 2000) or improve

quality (Dranove et al., 1998) in the health care

industry. These efforts can be in the form of selective

contracting (e.g., HMOs, PPOs), utilization

reviews (Dranove et al., 1998), or other mechanisms

that organizations across this industry use

to achieve these objectives.

Pressure on the industry to control costs while

maintaining reasonable, consistent levels of quality

(Dranove and Shanley, 1995) has come from both

the private and public sectors. These forces materialized

in the form of increasing enrollments in

managed care systems (MCS) like health maintenance

organizations (HMOs) or preferred provider

Copyright ? 2003 John Wiley & Sons, Ltd. Strat. Mgmt. J., 24: 333–347 (2003)

Evaluating Strategic Competencies in the Hospital Industry 335

organizations (PPOs) (Burns et al., 2000) that

attempt to negotiate favorable contracts with hospitals

in order to meet their employee or customer

needs (Dranove and White, 1994). From the public

sector, federally funded programs like Medicare

and Medicaid, where the ratio of payments to costs

has been declining over time (Dranove and White,

1994), again apply downward pressure on profits.

In essence, managed care is predicated on the

concept of enhancing buyer power relative to

health care service providers such as hospitals. The

effectiveness of this buyer power, however, may

vary widely across the industry due to significant

differences in the percentage enrollments in MCS

and in the percentage of patients covered by Medicare

and Medicaid payments in the various hospital

markets. However, a negative relationship between

buyer power and hospital profitability is expected.

Hospital rivalry

Managed care has succeeded not only in enhancing

the market power of health care buyers; it has also

stimulated increased rivalry between hospitals that

are vying for managed care patients. One would

suspect that in an environment of increasing rivalry

organizations must increase the value of their products

or services by increasing quality or reducing

costs to maintain profit margins (Teisberg et al.,

1994). However, historical depictions of the hospital

industry have painted a different picture, with

costs and prices thought to be positively related to

hospital competition (Dranove and White, 1994;

Manheim et al., 1994). The recent shift of responsibility

of payment to the large, highly informed

MCS has seemingly put this industry back under

the umbrella of standard economic theory (Dranove

and White, 1994).

Contradictory evidence still exists, however. For

instance, Gapenski, Vogel, and Langland-Orban

(1993) found no relationship between increasing

hospital rivalry and lower profitability. Other studies

have found that markets characterized by higher

levels of competition had lower rates of cost inflation

(Melnick and Zwanziger, 1988; Robinson and

Luft, 1988; Robinson and Phibbs, 1989). A more

recent study by Rivers and Asubonteng (1999)

found that rivalry has been associated with higher

not lower costs, supporting the results of studies

completed prior to significant implementations of

managed care. This result may be due to the fact

that rivalry has pushed hospitals to try to differentiate

themselves by investing in expensive hightechnology-

based services (Anderson and Steinberg,

1994).

One of the characteristics of the majority of

these studies is that they focus on the singular relationships

between competition and price or competition

and costs. Given the conflicting pressure on

hospitals to provide additional value in the form

of higher quality, lower costs, or a combination

of the two, the relevant question with regard to

industry structure is whether hospitals striving to

increase value are less profitable in markets that

are more rivalrous. It may be that the focus on

providing increased value results in both higher

prices and higher costs in increasingly rivalrous

markets, with the question of changes in relative

profits within the market providing the critical

information. Assuming that current hospital markets

function as described by Bain (1956) in his

discussion of the strategy–structure–performance

relationship within industries, we would expect

that markets exhibiting higher levels of rivalry

would also display relatively lower levels of profits.

Individual firms in market areas with relatively

smaller firms (less concentration) will have a more

difficult time recouping the additional costs of differentiation.

Within this industry framework, hospitals can

set strategies that attempt to mitigate some of

this pressure on profits (Porter, 1991). While the

SCP model suggests variables that may influence

industry performance, for example, raising entry

barriers or decreasing rivalry, the RBV focuses on

organizational choices concerning the acquisition

or use of resources and capabilities to generate

rents while recognizing these external pressures

(Conner, 1991).

Strategic competencies and hospital financial

performance

Consistent with the earliest works within the strategic

management field (Wernerfelt, 1984; Penrose,

1959), RBV provides a theoretical foundation

to test the relationships between organizational

resources, environmental context, and firm performance

(Barney and Zajac, 1994). In the general

hospital industry, the ability of a hospital in a specific

local market to develop capabilities relatively

superior to its competitors is critical for success.

In order to result in superior rents, the capabilities

Copyright ? 2003 John Wiley & Sons, Ltd. Strat. Mgmt. J., 24: 333–347 (2003)

336 T. J. Douglas and J. A. Ryman

utilized by the hospital must meet the RBV criteria

of value, rareness, and inimitability (Barney, 1995;

Black and Boal, 1994). Hospitals must focus on

meeting the needs of their customers with services

that have significant value within the industry

environment, are sufficiently different from other

hospitals in their local market, and require physical

and human assets that are difficult to imitate.

One important consideration within this industry

is that a ‘service’ is being delivered as opposed

to a product being manufactured. Most of the terminology

within the RBV literature has focused

on manufacturing. Within a service industry, many

of the capabilities in question work directly on or

with the customer to produce the service. The use

of the service occurs simultaneously with its production

(Bowen and Ford, 2002). Capabilities used

to deliver services in service industries, like the

general hospital industry, that result in superior

rents will be called strategic competencies. This

will distinguish them from similar terms used in

the literature that describe sources of competitive

advantage in manufacturing, such as core competencies

(Prahalad and Hamel, 1990) or distinctive

competencies (Grant, 1991; Snow and Hrebiniak,

1980). Strategic competencies pertain to

the services offered by an organization that are

superior in the marketplace and result in competitive

advantage.

For the hospitals capable of formulating and utilizing

strategic competencies, a competitive advantage

should be realized. In other words, the acquisition

and deployment of a set of valuable and distinctive

competencies, as represented by the medical

services offered, will enable a hospital to establish

a favorable reputation in the market, thereby

attracting physicians and their patients. The more

distinctive a hospital’s competencies are in a market,

the greater the competitive advantage. With

this in mind, the following hypothesis is offered:

Hypothesis 1: The value of a hospital’s strategic

competencies is positively related to hospital

financial performance.

Interorganizational strategic competencies and

hospital financial performance

The relational view (Dyer and Singh, 1998) has

been offered as an alternative perspective of competitive

advantage. Like the RBV, the relational

view notes that competitive advantage is derived

from unique and valuable resources. However,

while the RBV focuses on resources internal to the

firm, the relational view contends that resources

or capabilities that are needed by the firm may

reside outside the firm and are accessed or created

through building relationships with other firms.

Thus, by sharing resources firms are better able

to jointly position themselves in their environment

(Baum, Calabrese, and Silverman, 2000).

As noted above, managed care is forcing hospitals

to deliver health care services more efficiently

and effectively. In the U.S. health care

industry, hospitals, physicians, and insurance companies

have traditionally operated independent of

each other and, as a result, the provision of health

care has been very fragmented (Starr, 1994). However,

due to the growth of managed care (Dowling,

1995) and to rising uncertainty in the health care

environment, hospitals have reconsidered these traditional

approaches to health care delivery in favor

of more integrated and coordinated systems of care

(Zuckerman, Kaluzny, and Ricketts, 1995). Zuckerman

and his colleagues argue that these ‘integrative’

alliances are being formed to strengthen market

positions by effectively combining capabilities

in a vertical manner with the goal of enhancing

each organization’s competitive advantage.

One of the major developments in the production

of medical services is the integration of physicians

into larger organizations, like hospitals (Burns,

DeGraaff, and Singh, 1999; Goes and Zhan, 1995).

These newly formed group practices take advantage

of the larger scope of services that can be

offered, along with the cost efficiencies of locating

services centrally and sharing administrative

burdens (Zuckerman et al., 1995). As of 1996, 85

percent of hospitals in the United States had integrated

with physicians in some manner (Shortell

et al., 2000).

Based on the logic of the relational view, the

linkages between hospitals and physicians provide

both parties with the opportunity to combine

resources needed to establish advantageous competitive

positions. From the perspective of the hospital,

linkages with physicians essentially provide

access to patients. Access to patients is particularly

critical in an environment where cost control

efforts are focusing on reducing the usage of inpatient

hospital care and expensive medical services.

From the perspective of the physician, forming

relationships with hospitals gives physicians access

to a broad range of hospital services. Shortell

Copyright ? 2003 John Wiley & Sons, Ltd. Strat. Mgmt. J., 24: 333–347 (2003)

Evaluating Strategic Competencies in the Hospital Industry 337

et al. (2000) found that physicians are especially

attracted to hospitals that focus on innovation and

delivery of new services. Those physicians that are

linked to hospitals that offer the latest cutting-edge

medical technologies and/or have the strongest reputations

in the market will be able to attract the

most patients. Through these interorganizational

linkages, both the physician groups and the hospitals

are able to combine complementary resources

and offer an efficient and differentiated continuum

of care.

As discussed above, capabilities utilized to deliver

services that result in superior rents are called

strategic competencies. Hospitals that integrate

with physician groups with the result of enhancing

their strategic competencies within the market can

potentially achieve competitive advantage. In fact,

Shortell et al. (2000) found that broadly defined

integrated health care systems that integrated with

physician groups experienced higher total revenues

and cash flows. With this in mind, we offer the

following hypothesis:

Hypothesis 2: Developing strategic links with

physician groups in a manner that enhances

strategic competencies will be positively related

to hospital financial performance.

Influencing the buyer power/performance

relationship

While the above hypotheses portray direct relationships

between constructs presented in the RBV,

relational views, and hospital financial performance,

it is important also to consider whether

these constructs interact in ways that mitigate the

forces associated with the SCP model presented

above. Porter (1980, 1991) prescribed the use of

strategic behavior by individual firms to influence

industry structure. The recent empirical study by

McGahan and Porter (1997) confirmed an interaction

between industry and company-associated

variables. One way that firms could enact their

environment is to identify and procure resources

that would mitigate important industry forces pressuring

organizational profits.

The RBV suggests that if an organization is able

to establish an advantageous position in the market

it will be less susceptible to buyer power. If a hospital

is able to establish a differentiated position

in the market by building strategic competencies

that few other hospitals in the market can match,

then the buyer (the MCS) will be more willing

to pay a premium for those services. Or, alternatively,

the MCS will be less willing to utilize

bargaining power to force the hospital to accept

lower prices for those unique and valuable hospital

services. Hospitals that are able to establish

an advantageous competitive position or a superior

reputation in the market will be better insulated

from increasing buyer power than their resourcedisadvantaged

counterparts. Based on the implications

of the RBV of competitive advantage, the

following hypothesized relationship is suggested:

Hypothesis 3: The relationship between industry

buyer power and hospital financial performance

will be less negative when the hospital possesses

strategic competencies.

An alternative method of establishing an advantageous

position in the marketplace would be to

gain access to important resources in other organizations

(Dyer and Singh, 1998). As proposed

above, the merging of capabilities between hospitals

and physician groups is expected to be positively

related to hospital financial performance.

This merging of capabilities may also have a mitigating

effect on the pressures exerted by industry

structure.

A merger or partnership between a hospital and

physicians group essentially represents a coordinated

set of complementary resource endowments.

This combination or ‘pooling’ of capabilities

enables the individual providers to build

joint strategic competencies that collectively are

valuable to the buyer. Since managed care has

created formidable buyers in this industry, utilizing

enhanced capabilities to deliver strategic

competencies should make a particular hospital

more attractive.

As outlined above, the potential ability of hospital/

physician group partnerships to lower combined

costs, share administrative duties, target referrals,

and deliver a broader range of valuable services

enhances their service line in a way that may move

them above industry standards. By providing these

shared strategic competencies, they are better able

to meet the needs of buyers with the result of lessening

this industry structure force. Therefore, the

following hypothesis is offered:

Copyright ? 2003 John Wiley & Sons, Ltd. Strat. Mgmt. J., 24: 333–347 (2003)

338 T. J. Douglas and J. A. Ryman

Hypothesis 4: The relationship between industry

buyer power and hospital financial performance

will be less negative when the hospital

has developed strategic links with physician

groups resulting in strategic competencies.

METHODS AND MEASURES

Research design and data collection

Much of the data were gathered on a secondary

basis for the 32 largest hospital markets in the

United States. While there is not a generally

accepted approach to measuring and defining hospital

markets (Dranove and White, 1994), hospitals

do compete within a limited geographic

region. Examples of approaches taken to derive

geographic-based market definitions include the

use of county designations (Irwin, Hoffman, and

Lamont, 1998), Health Service Areas, which account

for travel patterns within metropolitan areas

(Makuc et al., 1991), or simply all hospitals within

a designated distance of the focal hospital (Robinson

and Luft, 1988). In this study we utilized the

Metropolitan Statistical Area (MSA) to define the

hospital market. While this approach is not without

its weaknesses (Dranove and White, 1994), it

is the most common urban hospital market definition

designation (Dranove, Shanley, and Simon,

1992; Manheim, Bazzoli and Sohn, 1994; Ketchen,

Thomas and Snow, 1993). In addition to using

MSAs to define markets, this sample included only

general medical hospitals (Veteran’s Administration,

military-base, and specialty hospitals were

excluded). This resulted in a total sample size of

824 hospitals.

The second part of the data collection utilized

highly qualified industry experts to evaluate the

hospital and physician group resource endowments

with regard to their relative strategic value (see

the Appendix for a summary of the hospital and

physician group services included in this study).

The American Hospital Association (AHA) recommended

the six industry experts selected to

participate in this evaluation as the most highly

qualified and knowledgeable individuals. Two of

the industry experts were CEOs of large integrated

health care delivery systems. Three of the

experts were major or principal partners in firms

that specialize in consulting for the health care

industry. The final industry expert is a nationally

known scholar who has published extensively on

health care management issues. Subsequent to the

appraisal of the resource value survey, interrater

reliability between the six industry experts was calculated

which resulted in a reliability coefficient

of 0.712. Since this reliability coefficient indicated

sufficient agreement, the average of the six experts’

ratings for each hospital resource was calculated

and assigned as weights to each respective hospital

and physician group service endowments.

Variables and measures

The following section details the measures employed

in this study. The approaches used to operationalize

the relevant constructs are consistent with

methodologies used successfully in the literature.

Cash flow margin

The measure of hospital financial performance utilized

was cash flow margin (Gapenski et al., 1993;

McCue, 1991). Not-for-profit firms whose missions

are service oriented and not profit maximization

dominate the hospital industry. However, all

hospitals, whether for-profit or not, are necessarily

concerned with an adequate cash flow to sustain

operations. The cash flow margin (CFM) was calculated

as follows:

(Net income + Depreciation + Interest exp.)

(Net patient revenue + Total other income)

The cash flow margin measure of financial performance

for each hospital was calculated for the

years 1996 and 1997 and then averaged to eliminate

any single year anomaly. The data needed

to calculate this measure were obtained from the

1998 American Hospital Directory.

Strategic competencies

The strength of a hospital’s competencies is determined

by comparing the value of a hospital’s

service offerings to those of the competition. By

comparing the value of the bundle of services with

that of the competition, a measure of the distinctiveness

of each firm’s competencies can be

determined and competitor analysis can be conducted

(Chen, 1996). In order for a competency

to be considered valuable, it would have to either

help reduce costs or differentiate the firm relative

Copyright ? 2003 John Wiley & Sons, Ltd. Strat. Mgmt. J., 24: 333–347 (2003)

Evaluating Strategic Competencies in the Hospital Industry 339

to the competition (Porter, 1991). While certain

hospi