Criteria for evaluating strategic alternatives

Choosing the Best Strategy

Learning Objectives

After reading this chapter, you should be able to:

• Select criteria for choosing strategies appropriate to an HSO and its purposes.

• Use the criteria for evaluating strategic alternatives to help select the best one.

• Compare the differences between company partial, functional, and operational objectives, and among objectives, goals, and strategies.

• Explain why contingency planning is necessary and how to devise meaningful triggers and contingencies.

• Discuss why the board of directors has to be kept informed and involved throughout the strategic decision-making process.

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CHAPTER 7Section 7.1 Selection Criteria

This chapter explains how to choose the best strategy for the organization from a number of viable alternatives using carefully selected criteria and how to argue persuasively for its adoption (refer to Figure 1.1). It also shows how to arrive at the other strategic decisions and keep the board of directors involved through the process.

7.1 Selection Criteria An organization may have only a few courses of action open to it or a very large number of strategic alternatives. The goal is to pick strategies most likely to succeed. For instance, when you play the game “Rock, Paper, Scissors,” you have three strategies available. You

can choose to form your hand into a rock, a piece of paper, or a pair of scissors. Before making your choice, you consider some factors. What form did you choose in the last round of the game? What did your oppo- nent choose? Does your opponent’s body language offer any insight as to whether he or she will form rock, paper, or scissors? Does your body language change depending on your anticipated choice? These consider- ations are the criteria you use in mak- ing a choice.

In the “Rock, Paper, Scissors” game, winning may simply be the result of good luck. For HSOs choosing between strategic alternatives, the hope of good luck is not the best way

to select strategies. Organizations that systematically evaluate strategic alternatives and effectively implement the chosen strategies are the ones most likely to have “good luck.”

Choosing among alternatives becomes a little easier when each alternative is compared, one at a time, against a set of criteria. What kinds of selection criteria are appropriate? Because one of the conditions for creating a good strategy is that if implemented, it would lead to success for the HSO, the criteria to evaluate the strategic alternatives should together represent what “success” means to the organization. At times, the analysis is insufficient to decide an issue, and the decision may eventually turn on more subjective factors. Depending on the HSO and its particular situation, the criteria explored in this section are possible candidates that could be used to examine strategic alternatives given an organization’s current standing and future outlook.

OJO Images/SuperStock

HSOs that want to strategize effectively should not rely simply on luck but rather on careful planning and assessment.

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CHAPTER 7Section 7.1 Selection Criteria

Adherence to Mission

While many publicly traded companies outside of the healthcare industry use share- holder value as a primary criterion for choosing among alternative strategies, this is often not the top priority for HSOs. Whether the HSO is for profit or nonprofit, the delivery of healthcare services is usually patient centered and mission driven. Improving the health of the community and providing high-quality services are often goals found in an HSO’s mission statement.

When the HSO is affiliated with a religious organization, strategic priorities are influ- enced by a sense of calling to work for the common good. When selecting among various strategic alternatives, a religiously affiliated HSO would want to consider the impact on people’s health and the system’s ability to care for the poor and vulnerable.

The highly competitive nature of today’s healthcare market has resulted in the missions of nonprofit HSOs and the means used to pursue them becoming more closely aligned to those of for-profit HSOs (Reeves & Ford, 2004).

Revenue Growth

Revenue growth is one of the most common criteria. Without revenue growth, for example, a religously affiliated HSO would not be able to continue its mission of caring for the poor and vulnerable. A striking example of revenue growth is illustrated in Case Study: Carolinas HealthCare System.

Case Study: Carolinas HealthCare System

For years, Charlotte Memorial Hospital had been a charity care facility that “lost money every year because most of its patients couldn’t pay their bills” (Garloch & Alexander, 2012, para. 2). Today, Charlotte Memorial is part of Carolinas HealthCare System, which owns or manages about 30 affiliated hospitals in North and South Carolina, has nearly $7 billion in revenue, and is one of the largest public nonprofit health systems in the United States.

The transformation of Charlotte Memorial Hospital, a publicly owned facility, began in the early 1980s, when it became appar- ent the hospital could not continue to provide indigent care if it did not also attract paying patients. In 1983, its new CEO unveiled a plan to compete with newer facilities in the area by building a heart institute, space for physician offices, and an 11-story hos- pital tower to replace a 1940s wing. The CEO began to put the hospital in the black by improving collections from patients and insurers (Shinn, 2002). After this expansion, it continued to grow into a large health system that today directly employs more than

(continued)

© Images.com/Michael Aveto/Corbis

The Carolinas HealthCare Systems success story shows that a health system can provide quality indigent care and also achieve profitability.

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CHAPTER 7Section 7.1 Selection Criteria

Case Study: Carolinas HealthCare System (continued)

1,900 physicians and serves patients at hospitals and other care locations, including freestanding emergency departments, outpatient surgery centers, pharmacies, laboratories, imaging centers, and nursing homes.

While delivering on its mission to take care of all citizens with outstanding healthcare, Carolinas HealthCare System has also had tremendous revenue growth, so much so that in June 2011, Meck- lenburg county commissioners voted to stop paying Carolinas HealthCare $16 million a year to care for the uninsured, as it no longer needed taxpayers’ help (Garloch & Alexander, 2012).

Profitability should be used as a criterion for selecting strategies when an HSO has insuf- ficient working capital or inadequate or negative cash flow, when profits in recent years have been flat or negative, or when it is highly leveraged (significantly more debt than equity). Today, healthcare organizations are facing increasing financial risk, which requires strategic management to be more clearly linked to financial planning (Zuckerman, 2012). Weiss (2005) recommends that HSOs conduct a sound cost analysis, ideally hiring a con- sultant to assist in identifying the expenses associated with a particular strategy as well as the financial implications of various choices (for example, joint venture versus buy). Although profitability will always be a factor, noneconomic questions such as “How will this investment improve coordination of patient care?” are also important to consider.

For publicly traded HSOs, shareholder value is an important criterion, for choosing not only from among alternative strategies, but also from among alternative investments. It requires an HSO to have a model for computing shareholder value so that the computa- tion for each strategic alternative or investment uses common values of discount rates and common assumptions about the future environment. In this way, the results become comparable.

Riskiness

Organizations vary in their propensity to take risks. They are more inclined to take risks when the decisions have paid off for them in the past and when they have sufficient capi- tal to afford a few mistakes. But degree of risk or riskiness as a criterion is more than this. An HSO’s culture can, for example, be risk averse. In this situation, the organization will avoid risk even when the risk has favorable odds of success. Risk can be analyzed and measured, but few HSOs have the skills to perform such analyses. Instead, the leaders prefer to make a risky decision according to instinct, or assess risk by venturing an opin- ion or two (guessing), or even ignoring any underlying risk. One way in which risk can be discussed among a group of people who are not risk analysts is as follows: Because all alternatives except “status quo” involve doing something the organization has never done before, “risk” can be used as a subjective measure of the likelihood that an HSO can implement the strategy successfully. Some alternatives are sure to score higher or lower than others when risk is viewed this way.

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CHAPTER 7Section 7.1 Selection Criteria

Timing

There may be issues of timing to consider among the strategic alternatives in question. Some alternatives are sensitive to when they are implemented, such as accelerating intro- duction of a new service or entering a particular market. For example, in August 2013 the insurance company Wellpoint signed a contract with Univision, the Spanish-language media network, to be the exclusive sponsor of its popular health-related programming. This deal is intended to give Wellpoint an advantage over other insurers in connecting with Latinos to sign them up for coverage (Gold, 2013). If implementing an alternative now increases its likelihood of success as opposed to doing it later, this may be reason enough to choose it. Conversely, if doing it now reduces any advantage you might other- wise have, such as investing in a new medical building just as the economy turns down sharply, then that may be reason enough to reject the alternative. However, using this criterion typically requires more data.

Investment Requirements

Amount of investment required is a practical criterion. If a particular strategic alternative requires an amount of capital the HSO does not have or cannot secure, then it should not even be considered a bona fide alternative because it is not feasible. Of course, the organi- zation could borrow more money, but it must be careful not to exceed some value of debt- to-equity ratio required by creditors or increase its debt to the point where its cash flow cannot service the debt. Obtaining equity capital may be relatively easy for a public com- pany that has been performing well, but not so for a private company. In certain circum- stances, an HSO could go public and raise some equity capital; in many circumstances, this is not possible.

Some private HSOs turn to the venture capital market for funds. For instance, U.S. Renal Care, a network of 85 dialysis centers as well as home and specialty hospital dialysis programs, was started in 2000 with funding from private equity investors (Walsh, 2012). To support its expansion strategies, Heart to Heart Hospice, a provider of hospice care based in Plano, Texas, secured a minority investment from Summit Partners, a growth equity firm in Boston (Walsh, 2013).

An HSO could find a partner to share some of the risk and put up some of the capital required. But in this case, profits resulting from the strategy must also be shared. Finally, being acquired by the right organization could provide the capital needed to finance a strategy, but this step should be taken only in the best interests of the organiza- tion, not just as a means of raising capital. In its

most simplistic application, all other things being equal, it makes more sense to choose a strategy that requires less investment over another that requires more.

Alex Williamson/Ikon Images/Getty Images

Some private HSOs turn to the venture capital market for funding.

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CHAPTER 7Section 7.1 Selection Criteria

Even when an organization can come up with the investment required by a particular alternative, an appropriate criterion might be return on investment (ROI) (a profitability measure) and how soon the investment can be recouped; a breakeven point in months is desirable. Clearly, an alternative with a shorter breakeven point is more attractive to an organization with scarce resources, such as a physician group considering the addition of “in house” magnetic resonance imaging (MRI) diagnostic services. A higher ROI is more attractive when increased profit is a critical measure of performance. It may make sense to choose a strategy that requires a higher investment if that investment can be recouped quickly and yields a higher return.

Organizational Culture

An organization might choose an alternative that suits its existing organizational culture over one that requires a cultural change for the strategy to succeed. Ideally, an HSO’s existing culture does not constrain its choice of strategy. Just as “form follows function,” so also does “culture follow strategy.” Changing the culture to support the right strategy might be preferable to limiting an organization to a strategy that fits the existing culture. Imagine what might have occurred at Charlotte Memorial Hospital had the culture not changed to embrace the growth required to meet its mission of taking care of all citizens regard- less of their ability to pay.

Often, shifting the organizational cul- ture is necessary when new strategies are required. If this does not happen, “the traditional culture—the beliefs, the practices and ‘the way things are done around here’—will override the new direction and prevent innova- tion and positive change” (Browning, Torain, & Patterson, 2011, p. 12). If an organization is trying to change its strategy with the presumption that the culture will also change, it may find the strategy almost impossible to implement because the unchanged culture is impeding it. It is well known that chang- ing an organizational culture is exceedingly difficult and, for large organizations, takes a lot of time (recall the discussion in Chapter 2). If every alternative considered requires the culture to change, the alternative that matches the existing culture the most and would therefore require the least change should, perhaps, be chosen.

© Royalty-Free/Corbis/Fuse/Thinkstock

Organizational culture—which may involve attitudes regarding who socializes with whom both in and outside the workplace—is often extremely difficult to change, especially in large HSOs.

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CHAPTER 7Section 7.1 Selection Criteria

Characteristics of Successful Strategies

Beckham (2000) proposes seven key characteristics of effective strategy. These success characteristics can help HSOs choose among alternatives:

• Sustainability: Does it have lasting and greater long-term impact than other alternatives?

• Performance improvement: Will it result in significant improvement in key measures of performance?

• Quality: Is it a provably better strategy than those of competitors? • Direction: Does it advance the organization toward a defined goal? • Focus: Is it targeted and does it offer a reasonable choice for a particular course as

compared to other attractive alternatives? • Connection: Do its elements offer a high level of interdependence and synergy? • Importance: Is it significant or fundamental to the organization’s mission,

although it may not be essential to organizational success?

As you can see, there are many questions that an organization must consider when select- ing among strategic alternatives. Which alternative will most help the HSO maintain or increase its patient satisfaction lead over its competitors? Or give it the quality advantage it never had? Or help it become more innovative and technologically competitive? As more HSOs realize that new markets lie in foreign countries, developing a global presence could become a prime factor.

Clearly, some characteristics make sense only for some organizations in certain situations while others apply to almost all HSO situations. The success characteristics you ultimately use in your analysis must fit the organization you are analyzing. For example, to some organizations, profit is the primary indicator of success. Elsewhere, success may be mea- sured by the health improvements of the community, the percentage of services provided to indigent patients, or the reduction of hospital readmissions.

Many of the considerations discussed in this section do not fit the circumstances of public health entities. The process of strategy formulation in a county or city health department, for example, might involve considering the following factors when selecting among sev- eral strategic alternatives:

• Cost or return on investment • Availability of solutions • Impact of problem • Availability of resources (e.g., staff, time, money, equipment) to solve problem • Urgency of solving problem (swine flu or significant air pollution) • Size of problem (e.g., number of individuals affected) (National Association of

County and City Health Officials, n.d.)

Case Study: Kansas Tobacco Prevention Workgroup for Specific Populations illustrates how one group evaluated alternative strategies for addressing a public health concern.

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CHAPTER 7Section 7.1 Selection Criteria

Case Study: Kansas Tobacco Prevention Workgroup for Specific Populations

In 2007, the Kansas Department of Health and Environment hosted meetings of a workgroup formed for the purpose of identifying critical issues and developing a strategic plan for tobacco use prevention among subpopulations that experience the greatest health burden from tobacco use and exposure. This workgroup, entitled the Kansas Tobacco Prevention Workgroup for Specific Populations, included representatives from HSOs, schools, youth programs, churches, public health centers, and other community social agencies (Tobacco Prevention for Specific Populations, 2013a).

At the first meeting, the workgroup discussed the subpopulations to be the focus of its efforts and issues facing the health department in reducing tobacco use in these populations. A nominal group process (multi voting) was used to select the following critical issues:

• Collaboration/partnership • Funding • Marketing/counter marketing (media) • Data • Trust/building capacity/outreach/resource center • Population-specific interventions that can be integrated into other programs

(education) • Advocacy and policy development • Addressing systemic changes (silos) (Tobacco Prevention for Specific Populations,

2013b, p. 3)

At the second meeting of the workgroup, participants used the criteria below to select alternative strategies for reducing tobacco use in specific subpopulations:

• Urgency: Is this a priority issue that needs to be addressed in the next 1–3 years?

• Potential Impact: Is it likely that address- ing this critical issue will have a significant impact on one or more specific popula- tions? Do you have reason to believe you can be successful on this issue?

• Actionable/Feasible: Are there oppor- tunities for action to address the critical issue? Is there room to make meaningful improvement on the issue?

• Resources: Are resources (funds, staff, expertise) either readily available or likely to be obtained in order to address the critical issue? Are there resources through the state and community members to work on the issue? If not, can resources be acquired?

• Community Readiness: Is this a critical issue identified as important by the community? Are people in the community interested in the issue? Is there community momentum to move this initiative forward?

• Integration: Is there opportunity for collaboration? Is there opportunity to build on existing initiatives? Will this duplicate efforts? (Tobacco Prevention for Specific Popula- tions, 2013c, p. 11)

BELMONTE/BSIP/SuperStock

Public health initiatives by state and local groups are improving the health of communities throughout the United States.

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CHAPTER 7Section 7.2 Criteria Matrix

7.2 Criteria Matrix One method that has been developed as a tool for evaluating strategic alternatives is called the criteria matrix. It entails choosing five or six criteria most important to the organiza- tion and assigning a numerical rating as a means of identifying the best strategy. Another benefit of creating and using the criteria matrix is to use it as a worksheet in developing defensible and persuasive arguments for your preferred strategy.

Experience has shown that using five or six criteria to evaluate the strategies makes the most sense. This range works because using too few criteria fails to capture the complex- ity inherent in the strategies, and using too many runs the risk of introducing conflicting criteria, which dilutes the effect of each criterion on the final outcome.

The criteria to use are entirely up to your management team. “Playing” with several crite- ria can be a useful way to learn of the strategies’ sensitivity to various combinations of cri- teria. When necessary, managers should supplement this analysis with detailed forecasts and analyses. For example, to assess which strategy might yield the most revenue growth were each one implemented, the team should conduct a more detailed revenue forecast for each strategy over the planning horizon (3 to 5 years). Even though such projections are still estimates and based on assumptions, they require more reflection and thought than mere guesses.

Notice also that many of these selection criteria address the purpose for doing strategic formulation in the first place and what the organization perceives as success. It is fitting that criteria used to chart the future direction of the HSO be as important to an organiza- tion as its fundamental purposes and what it views as success.

The criteria matrix allows organizations to evaluate strategic alternatives against multiple criteria using a scoring system that enables the results to be added up at the end. Small HSOs may be faced with just a few or less complex strategic alternatives. In these situa- tions, a simple criteria matrix might work just fine. The criteria matrix used by the Kansas Tobacco Prevention Workgroup for Specific Populations to select among alternative strat- egies is illustrated in Table 7.1. The workgroup ranked each strategy according to criteria

Discussion Questions

1. Many candidates for possible strategy selection criteria were presented in this section. It makes sense that the criteria should be related to the HSO purposes or what “success” means to the organization. Which of the criteria discussed have little or nothing to do with purposes?

2. Why were the criteria in question 1 included in the list of possibilities? 3. Which of the criteria discussed would be most useful for a hospital in differentiating among

strategic alternatives? Which would be most useful for a physician clinic? For a publicly funded community health center?

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CHAPTER 7Section 7.2 Criteria Matrix

that had been established (see Case Study: Kansas Tobacco Prevention Workgroup for Specific Populations) using the following scale: High = 3 points, Medium = 2 points, Low = 1 point. The top three strategies with the highest points were identified and then discussed to be sure there was group consensus before moving forward with planning.

Table 7.1: Simplified strategy prioritization matrix

Criteria

Urgency Potential Impact

Actionable/ Feasible

Resources Community Readiness

Integration Total Points

Alternative A 3 2 3 1 3 2 14

Alternative B 1 2 3 2 2 3 13

Alternative C 2 3 3 2 3 3 18

Alternative D 3 2 2 1 3 2 13

Source: Tobacco Prevention for Specific Populations (2013d). Strategy Prioritization Matrix. Retrieved from www.healthykansans2010 .org/tobacco/meeting2.asp, p. 2.

An example of a matrix that might be used by a large, publicly traded HSO is illustrated in Table 7.2. The first step is to choose a set of criteria that makes sense for the HSO. These may include some of those criteria described in the previous section and perhaps others relevant to the organization and its present circumstances.

The next step is to assign a rating to each criterion on a 10-point scale. Some criteria are positively correlated and some negatively correlated. These are indicated with a (P) or (N) in the matrix. An example of a positively correlated criterion is revenues: An alterna- tive that might yield high revenue growth is good for the HSO, but low revenue growth is bad. The two go in the same direction so to speak (high growth = good, low growth = bad), so the criterion “revenue growth” is positively correlated. In such instances, the rat- ing would range from 0 to plus 10. A neutral alternative would be scored 0, whereas an alternative that would be strongly favorable to the HSO might be a 9 or a 10. An example of a negative correlation is “size of investment required”: An alternative requiring a lot of investment is “bad” for the HSO, but a small investment requirement is “good.” The two go in opposite directions (a lot = bad, little = good). For a negatively correlated alterna- tive, the rating would range from 0 to minus 10. Thus, an alternative that is not risky at all would get a 0 score, one that is moderately risky a score of perhaps minus 5, and an extremely risky one perhaps minus 7 to minus 10. Table 7.3 lists examples of positively or negatively correlated criteria.

The rating scores are subjective estimates; the absolute value of the rating is not as impor- tant as spacing them according to an estimate as to how close or far apart the alternatives are. It is the relative ratings that are critical. The alternatives are rated against each crite- rion independently of any other criterion. When all the ratings are done, the scores are

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CHAPTER 7Section 7.2 Criteria Matrix

added up to see which alternative has the higher (if evaluating two) or highest total score. Table 7.4 offers an example of how this might be done.

Table 7.2: Criteria matrix for evaluating alternative strategies in publicly traded HSOs

Criteria Alternative A Alternative B Alternative C

Revenue growth 8.0 8.0 9.0

Profitability 7.0 7.5 8.5

Shareholder value 8.0 7.0 8.0

Riskiness -8.5 -8.0 -8.5

Investment required -7.0 -9.0 -9.5

Change in culture required

-6.5 -8.0 -6.0

Totals 1.0 -2.5 1.5

Table 7.3: Examples of positively and negatively correlated criteria

Positively correlated Negatively correlated

Revenues or revenue growth Capital investment required

Contribution to shareholder value Change in culture required

Return on investment Time to break even

Adverse effect on competitors Overall riskiness

Strength of value proposition

Gaining or extending a competitive advantage

Increasing bargaining power

Advancing mission

Table 7.4: Criteria matrix revised from Table 7.2

Criteria Alternative A Alternative B Alternative C

Revenue growth 7** 8 9*

Profitability 7** 8 9*

Shareholder value 6** 7 9*

Riskiness -7 -8 -9

Investment required -7 -9** -8

Change in culture required

-7 -9** -6*

Totals -1.0 -3 4

* Reasons to select ** Reasons to reject

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CHAPTER 7Section 7.2 Criteria Matrix

In Table 7.2, the strategic alternative that receives the highest total is option C. However, option A’s total score is so close to C’s that it makes arguing for C being the best alterna- tive open to question. This is where other considerations come into play. If market share or profitability is par- ticularly important to the HSO (reve- nue growth), or if the HSO is strongly averse to changing its culture, then the analysis would suggest option C. But the table also shows that option C requires the most investment, and if the organization is unable to raise the needed capital, that could be the one reason to reject it.

To avoid a situation where there are two alternatives that achieve almost equal ratings, the choice of criteria and assigned ratings are revised until there is a clear winner by at least three points. While this appears to be “fixing” the result, the process is still in “analysis” mode, which means that managers are free to try different criteria and rat- ings until they are satisfied they have a defensible strategy. After all, defending and being comfortable with the choice of strategy is what this whole exercise is about. It is that ulti- mate defense before top management or the board of directors that will keep anyone from “fixing” the ratings to yield a preordained result. A preordained or poorly argued result can be spotted a mile away and will damage its proponent’s credibility. So while this analysis is being done, it is important to remember to choose only that alternative that can be supported persuasively; the scoring system will help in that regard. The criteria matrix and the associated process of selecting criteria and rating strategies against them is simply an opportunity to develop arguments to defend or “sell” the preferred choice to others.

The danger with using such a quantitative yet still subjective method to choose among strategic alternatives is that it invites criticism precisely because one person’s criteria and ratings may not match anyone else’s. The results are sensitive to the criteria chosen. Using shared or consensus ratings within a group is one way to get around this problem and to try out different combinations of criteria. The principal value of the criteria matrix, however, is to force planners to test their choice of alternatives against different criteria in case other people believe such criteria are important. In the case of disagreement, those who have gone through this exercise will have “done their homework” and will be able to discuss—and perhaps refute—other people’s points of view.

In comparing Tables 7.2 and 7.4, note that the latter uses only whole numbers; because the ratings are “educated guesses” in the absence of any data, estimating to one place of deci- mals belies a level of accuracy that is often not there. Arguments involved in the selection of a strategy consist of two parts: (1) reasons why the preferred strategy was chosen and

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When evaluating strategic alternatives, choose only the strategy that can be supported and defended persuasively before top management.

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CHAPTER 7Section 7.3 Determining Objectives

Discussion Questions

1. The section advises that one should use 5–6 criteria in a criteria matrix. Discuss arguments of your own concerning why using a smaller or larger number of criteria would or would not work.

2. Would using more criteria produce a different result? Would it inspire more or less confi- dence in the result?

3. Compare the rating scales used in the Table 7.1 matrix and in the Table 7.2 matrix. How would using a 3-point scale versus a 10-point affect the prioritization process?

4. Assume you have developed a good criteria matrix and are now working on a convincing argument for your winning strategy. But what the criteria matrix reveals, in your opinion, doesn’t make for a convincing argument. What do you do?

5. The overarching purpose of a criteria matrix is to choose a preferred “best” strategy and argue persuasively to others (perhaps even yourself) that it is the best one. Can you think of another method or process that would lead to the same result? Explain it.

(2) reasons why the other two were rejected. The best ratings in the table are highlighted in the winning strategy. Thus, in Table 7.4, if option A was “forming new partnerships,” option B was “developing new services,” and option C was “expanding nationally,” the argument would look like this:

The organization should expand nationally because doing so would gener- ate the most revenue growth and profitability, increase shareholder value the most, and require the least culture change. Forming new partnerships would generate the least revenue growth and profitability and increase shareholder value the least, while developing new products would require the most investment and culture change.

Here’s a final comment on strategy analysis using the criteria matrix. It could be that the strategy chosen best meets all the criteria and one of the other two strategies falls short of all the criteria. This means a couple of things: (a) the winning strategy is so much better than the others and the one that falls short of all the criteria is so much worse than the others that it reflects badly on how the strategy alternatives were selected in the first place (they are all supposed to be good, viable strategies), and (b) the third strategy is left with no reason to reject it, which also hurts the argument. In such a case, the criteria matrix should be reworked so that the winning strategy is still the one that would prevail but would not be better than the other two on all criteria.

7.3 Determining Objectives Now that strategies have been selected, the planning process enters the recommendations phase. Recommendations include setting organization-wide objectives, defining strategic intent, identifying key programs to achieve the objectives, and exploring triggers and con- tingencies if things do not go as planned. Creating or revising mission and vision state- ments is also part of this final phase if the organization’s existing statements are no longer valid, or if the organization has never had them before.

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CHAPTER 7Section 7.3 Determining Objectives

An objective is a quantitative target to be achieved within a specified time frame. Typi- cally, the most common objectives in HSOs fall into these categories:

• Better-quality care • Improved patient safety • Improved capacity • Secure financial future • Better management of human resources • Improved customer service

It may seem odd to some that set- ting objectives comes after choosing a strategy. They may find it more logical to first set objectives and then choose a strategy to achieve them. Ideally, they should be set together, that is, iteratively until they fit with each other. But that is hard to do. Deciding on a strategy first makes sense for three reasons. First, it fol- lows naturally from identifying the organization’s key strategic issues, which in turn follow logically from the situation-analysis phase. Second, the selection of strategic alternatives creates a roadmap or direction for the HSO. Then, attention can be turned to deciding how far and how fast to go along that road (i.e., objectives).

Last, deciding on the strategy first allows many criteria to be used, enriching the assess- ment and ultimately the choice of strategy.

In addition, there are two problems with setting organization-wide objectives first. Where does the objective—the quantitative target—come from? Other than the case where the current strategy is being continued, setting an objective first lacks a context. For example, to meet a 20% revenue growth objective in 2 years may be possible by expanding into other states, but not by investing more in human resource development. Yet the latter may be the better strategy in the long run. Wouldn’t it make more sense to ask which of the two was capable of fulfilling the organization’s mission over the next several years?

The second problem with setting objectives first is their influence on strategy choices. For example, what if 20% revenue growth is the sole criterion for picking a strategy? How likely is the organization to consider any strategies that might not advance this objective? Wouldn’t it make more sense to use revenue growth in this instance as one of several important criteria? Would one be as content to achieve only the revenue-growth objective if the organization were also scoring low in quality and patient satisfaction results?

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Ideally, objectives and strategies should be set together, but when this is difficult to do, it makes sense to choose strategies first.

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CHAPTER 7Section 7.3 Determining Objectives

Some HSOs first set objectives and then evaluate strategic alternatives. One example is the 2011 winner of the Baldrige National Quality Award in the healthcare division, Schneck Medical Center, Seymour, Indiana. This hospital formulates strategies every 3 years. From November to February, senior leaders and the board of trustees do a com- prehensive assessment of internal and external factors to arrive at the strategic direc- tion. The next 2 to 3 months are spent developing strategic objectives and alternatives. The potential objectives are identified first and then strategic alternatives are selected to achieve the objectives. The impact of the alternatives and feasibility are evaluated before final decisions are made (Schneck Medical Center, 2011).