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Chapter 2 External Analysis

Why External Analysis Is Important

President Kennedy’s quote reminds us that organizational failure is often the result of failing to look to the future. Organizations fail to anticipate significant external changes and subsequently do not make the necessary adjustments in strategy that might save them. Organizational success is predicated on tailoring strategy – not to the past or even the present – but rather to well-informed, cred- ible assumptions about the future.

Looking to the future is both an art and a science. The art involves strategic think- ing and the science involves rigorous external analysis. Together, strategic think- ing and external analysis processes enable the generation of realistic strategic

“Change is the law of life. And those who look only to the past or present are certain to miss the future.”

—JOhn F. KenneDy, 35Th PresiDenT OF The UniTeD sTATes

Ginter, Peter M., et al. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/franklin-ebooks/detail.action?docID=5228460. Created from franklin-ebooks on 2023-09-29 01:09:17.

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38 strAtEgic mAnAgEmEnt of HEAltH cArE orgAnizAtions

assumptions about the future for strategy building. Both the art and science are critical for envisioning the future.

The art of looking into the future requires a strategic manager who is informed about and perceptive to an organization’s external changes – requiring an external orientation and inquisitive awareness. strategic managers must be able to see the big picture, understand relationships, and use systems thinking. They have to use critical thinking to determine the consequences and implications of what they see. These leaders need creativity to transform change signals into actions as well as create visions and strategic goals. As introduced in Chapter 1, strategic thinking is an art made up of awareness, anticipation, analysis, interpretation, synthesis, and reflection driven by a passion to know, understand, and succeed.

The science of anticipating the direction of change involves using structured processes for understanding an organization’s external conditions – the general (macro-environment), health care system, and service area changes – utilizing the processes of a number of external analysis tools and techniques. These processes help organize and structure information, aid in focusing on what is important, and provide a foundation for integrative strategic thinking. external analysis coupled with strategic thinking will generate new perspectives and insights to provide a plausible glimpse of tomorrow.

Use the concepts in this chapter to see into the future!

learning objectives

After completing the chapter you will be able to: 1. Discuss the significance of external analysis for health care organizations. 2. Articulate the specific goals of external analysis. 3. Point out some limitations of external analysis. 4. Describe how various types of organizations in society (the macro-environment),

the health care system, and the service area influence the delivery of health care. 5. Identify major general environment, health care system, and service area trends

affecting health care organizations. 6. Describe the utilization of key sources of external information. 7. Discuss important techniques used to identify and analyze external issues, trends,

and events. 8. Suggest several questions to initiate strategic thinking that focus on identifying

and responding to external change.

Strategic Management Competency After completing this chapter you will be able to map and analyze external issues, trends, and events in the general environment, the health care system, and the service area for a health care organization.

Ginter, Peter M., et al. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/franklin-ebooks/detail.action?docID=5228460. Created from franklin-ebooks on 2023-09-29 01:09:17.

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Chapter 2 external analysis 39

The External Nature of Strategic Management

external analysis requires strategic managers who search for ways to radically alter the status quo, create something totally new, or revolutionize processes. They search for opportunities to do what has never been done or to do known things in a new way. Therefore, the fundamental nature of strategic management requires awareness and understanding of outside forces. strategic managers encourage adoption of new ideas in the system, maintain receptivity to new ways of operating, and expose themselves to broad views. More specifically, leaders must have an understanding of the current and potential external issues, trends, and events that may impact the organization and be able to see new possibilities that these changes may bring. This understanding is informed through the pro- cess of external analysis. External analysis is a strategic thinking activity directed toward identifying, aggregating, and interpreting the issues outside an organiza- tion to determine the implications of those issues on the organization as well as providing information for internal analysis and the development of the direc- tional strategies. external analysis can remove the protective covering in which organizations often seal themselves.1 external analysis is a part of the situational analysis section of the strategic thinking map presented in Chapter 1 (exhibit 1–1).

The Goals of External Analysis Although the overall intent of external analysis is to position the organization within its industry and service area, more specific goals may be identified. The specific goals of external analysis are:

● To identify and analyze current important issues and changes that will affect the organization.

● To detect and analyze early or weak signals of emerging issues and changes that will affect the organization.

● To speculate on the likely future issues and changes that will have signifi- cant impact on the organization.

● To classify and order issues and changes generated by outside organizations.

● To provide organized information for the development of the internal analy- sis, mission, vision, values, goals, and strategy of the organization.

● To foster further strategic thinking throughout the organization.

in addition to the identification of current issues, external analysis attempts to detect early or weak signals outside the organization that may portend a future issue. Weak signals are early evidence of emerging trends from which it might be possible to deduce important changes in demography, technology, customer tastes, social, political or regulatory shifts, or economic patterns.2 sometimes based on little hard data, managers attempt to identify patterns that suggest emerging issues that will be significant for the organization. such issues, if they continue or actually do occur, may represent significant challenges or opportuni- ties. Timely identification of external issues aids in developing strategy.

Ginter, Peter M., et al. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/franklin-ebooks/detail.action?docID=5228460. Created from franklin-ebooks on 2023-09-29 01:09:17.

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40 strAtEgic mAnAgEmEnt of HEAltH cArE orgAnizAtions

strategic managers must go beyond what is known and speculate on the nature of the industry, as well as the organization, in the future. This process often stimu- lates creative thinking concerning the organization’s present and future products and services. such speculation is valuable in the formulation of a guiding vision and the development of mission and strategy. The bulleted list of evolving exter- nal issues at the beginning of Chapter 1 provided some of the emerging and spec- ulative forces that strategic managers might incorporate into their thinking today. There is an abundance of such external data. For it to be meaningful, managers must identify the data sources and aggregate and classify the information. Once classified, important issues that will affect the organization may be identified and evaluated. This process encourages managers to view external changes as issues that may affect the organization.

When strategic managers – top managers, middle managers, and front-line supervisors – throughout the organization are considering the relationship of external forces to the organization, innovation and improved customer satis- faction are likely. strategic thinking within an organization fosters adaptability, and those organizations that adapt best will ultimately displace the rest.

The Limitations of External Analysis external analysis is critical for understanding external changes, but it provides no guarantees for success. The process has some practical limitations that the organi- zation must recognize. These limitations include:

● external analysis cannot foretell the future. ● Managers cannot see everything. ● sometimes pertinent and timely information is difficult or impossible to

obtain. ● There may be delays between the occurrence of external events and man-

agement’s ability to interpret them. ● sometimes there is a general inability on the part of the organization to

respond quickly enough to take advantage of the detected issue. ● Managers’ strongly held beliefs sometimes inhibit them from detecting

issues or interpreting them rationally.3

even the most comprehensive and well-organized external analysis processes will not detect all the changes taking place. events may occur that are significant to the organization but were preceded by few, if any, signals; or the signals may be too weak to be discerned.

Perhaps the greatest limiting factor in external analysis is the preconceived beliefs of management. in many cases, what leaders already believe about the industry, important competitive factors, or social issues, inhibits their ability to perceive or accept signals for change. Because of managers’ beliefs, signals that do not conform to what they believe may be ignored. What an individual actually perceives is often determined by established paradigms (ways of thinking and beliefs). Thus, data that exist in the real world that do not fit the paradigm will have a difficult time permeating the individual’s filters – he or she will simply not see it.4 As creativity

Ginter, Peter M., et al. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/franklin-ebooks/detail.action?docID=5228460. Created from franklin-ebooks on 2023-09-29 01:09:17.

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Chapter 2 external analysis 41

expert edward De Bono explains, “[w]e are unable to make full use of the informa- tion and experience that is already available to us and is locked up in old structures, old patterns, old concepts, and old perceptions.”5 Despite long and loud signals for change, some organizations do not change until it is too late.

The Process of External Analysis

external analysis often is a complex undertaking. Therefore, a step-by-step process helps the identification and assessment of external issues likely to affect the organi- zation. As illustrated in exhibit 2–1, there are six steps to effective external analysis efforts.6 The strategic thinking states of awareness, anticipation, analysis, inter- pretation, synthesis, and reflection are particularly important in external analysis.

ExhIbIT 2–1 Process for External Analysis

Step 1 – Organize the External Analysis Process and Create an Issue Map Template

Step 2 – Scan the General Environment, Health Care System, and Service Area

Step 3 – Monitor and Con�rm External Issues

Step 4 – Forecast External Issues

Step 5 – Assess External Issues

Step 6 – Complete an Issue Map

Ginter, Peter M., et al. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/franklin-ebooks/detail.action?docID=5228460. Created from franklin-ebooks on 2023-09-29 01:09:17.

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42 strAtEgic mAnAgEmEnt of HEAltH cArE orgAnizAtions

Step 1: Organize the External Analysis Process engaging in strategic thinking and the process of external analysis can be over- whelming without some organization. Therefore, breaking the external analysis process into logical components can help focus strategic thinking to engage in the analysis process. in many respects organizations are similar to biological species – both are complex adaptive systems that are nested in broader systems. For example, natural systems are nested in the ecosystem, which is nested in the broader biological environment. similarly, health care organizations are nested in their service areas, the services areas are nested in the industry, and the industry is nested in the broader general or macro-environment as con- ceptualized in exhibit 2–2.7 in these nested systems, changes in one system will initiate changes in another system. For example, a change in national health policy, made in the macro-environment, will affect how the health industry

ExhIbIT 2–2 The Nested Environments of a Health Care Organization

General Environment

Health Care System

Service Area

Organization

• Government Institutions • Business Organizations • Educational Institutions • Religious Institutions • Research Organizations/Foundations • Individuals/Consumers

• Planning/Regulatory Organizations • Primary Providers • Secondary Providers • Provider Associations • Individuals/Patients

• Competitors • Government Services • Business Organizations • Not-for-Profit Organizations • Other Local Organizations • Individuals/Consumers

Ginter, Peter M., et al. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/franklin-ebooks/detail.action?docID=5228460. Created from franklin-ebooks on 2023-09-29 01:09:17.

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Chapter 2 external analysis 43

works (the health care system). These changes in the health care system affect the service areas in which health care organizations operate and ultimately influence the way in which health care organizations operate in those service areas. reciprocally, actions by the organization will change the nature of the service area, changes in service area will be a factor in determining the nature of the health care system, and how the health care system will impact the general environment.

Within these nested systems, organizations and individuals create change. Therefore, if health care managers are to become aware of the changes tak- ing place outside their own organization, they must have an understanding of the types of organizations that are creating change and the nature of the change. When systems are nested, change generally cascades from one sys- tem to another; however, similar to the natural environment, changes in any one system may simultaneously affect the other systems as well as individual organizations.8

in this chapter we will explore the types of change initiated in the general envi- ronment, health care system, and the service area. Chapter 3 will focus on service area competitor analysis and Chapter 4 will examine the organization.

The General Environment All types of organizations and independent indi- viduals generate important issues – and subsequently change – within the general environment. For example, a research firm that is developing imaging equipment may introduce a new technology that could be used by a variety of other organi- zations in diverse industries such as hospitals (magnetic resonance imaging) and manufacturing (robotics). The general environment is the broadest system and members may be broadly classified in a variety of ways depending on the strate- gic management needs of the organization but certainly include:

● Government institutions. ● Business organizations. ● educational institutions. ● religious institutions. ● research organizations and foundations. ● individuals and consumers.

Organizations and individuals in the general environment, acting alone or in concert with others, initiate and foster the macro-environmental changes within society. These organizations and individuals generate economic, social/demographic, legislative/political, technological, and competitive change that will, in the long run, affect many different industries (including health care) and may even directly affect individual organizations. Therefore, external organizations engaged in their own processes, and pursuing their own missions and strategic goals, will affect other industries, organizations, and individuals.

in general, external changes affect a number of different sectors of the economy. For example, passage of the prescription drug bill during the George W. Bush presidency affected a variety of organizations as well as individuals,

Ginter, Peter M., et al. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/franklin-ebooks/detail.action?docID=5228460. Created from franklin-ebooks on 2023-09-29 01:09:17.

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44 strAtEgic mAnAgEmEnt of HEAltH cArE orgAnizAtions

including insurance companies, organizations representing the elderly, and retir- ees. similarly, the early health care reform initiatives of the Obama administration resulted in the passage of ACA; however, its implementation was spread over a number of years and affected virtually all institutions in society, not just health care organizations. As U.s. national health care legislation evolves during the Trump administration, virtually all institutions and organizations will again be impacted.

The organization itself may be affected rather quickly by the economic, social/ demographic, legislative/political, technological, and competitive change initi- ated and fostered by organizations in the general environment. in the aggregate, these alterations represent the general direction of societal change that may affect the success or failure of any organization. Therefore, an organization engaging in strategic management must try to sort out the fundamental general environment changes and detect major shifts taking place. A shift in consumer attitudes and expectations concerning health care is an example of a societal change that may affect the success or failure of health care organizations. Demographic changes are somewhat more predictable and the growing number of seniors in the U.s. population will impact every aspect of society as well as the health care system. sometimes the demographics of the general environment provide leading indica- tors of health care trends.

Typically, as information is accumulated and evaluated by the organization, it will be summarized as issues affecting the industry or organization. The identi- fication and evaluation of the issues in society are important because the issues will accelerate or retard changes taking place within the industry and may affect the organization directly as well.

The Health Care System events in the health care system typically impact most significantly those organizations and individuals directly or indirectly involved in health care. Organizations and individuals within the health care system develop and employ new technologies, deal with changing social and demographic issues, address legislative and political change, compete with other health care organizations, and participate in the health care economy. Therefore, strategic managers should view the health care system with the intent of understanding the nature of all these issues and changes. Focusing attention on major change areas facilitates the early identification and analysis of industry-specific issues and trends that will affect the organization. in today’s health care system a more focused service area competitor analysis is typically required as well (see Chapter 3).

The wide variety of health care organizations makes categorization difficult; however, the health care system may generally be grouped into five segments: 1. Planning/regulatory Organizations. 2. Organizations that provide health services (primary providers). 3. Organizations that provide resources for the health care system (secondary

providers). 4. Organizations that represent the primary and secondary providers. 5. individuals involved in health care delivery and patients (consumers of

health care services).9

Ginter, Peter M., et al. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/franklin-ebooks/detail.action?docID=5228460. Created from franklin-ebooks on 2023-09-29 01:09:17.

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Chapter 2 external analysis 45

exhibit 2–3 lists the types of organizations and individuals within each segment and provides examples. The categories of health care organizations listed under each of the health care segments are not meant to be all-inclusive, but rather to provide a starting point for understanding the wide diversity and complexity of the industry.

ExhIbIT 2–3 Organizations in the Health Care System

Planning/Regulatory Organizations

Federal regulating agencies ● Department of Health and Human Services (DHHS) ● Center for Medicare and Medicaid Services (CMS) ● Centers for Disease Control and Prevention (CDC) ● Food and Drug Administration (FDA) ● U.S. Agency for Toxic Substances and Disease Registry (ATSDR) ● Environmental Protection Agency (EPA)

State regulating agencies ● Public Health Departments ● State Health Planning Agency (e.g. Certificate of Need or CON)

Voluntary regulating groups ● The Joint Commission (accredits 21,000 health care organizations in the United States) ● National Committee for Quality Assurance (NCQA)

Primary Providers (Organizations that Provide Health Services)

Hospitals ● Voluntary (e.g. Barnes/Jewish Hospital) ● Governmental (e.g. Veteran’s Administration Hospitals) ● Investor-owned (e.g. HCA – The Healthcare Company, Tenet)

State public health departments

Non-hospital health care facilities ● Skilled nursing facilities (e.g. HCR ManorCare) ● Assisted living facilities (e.g. Brookdale Senior Living Solutions) ● Intermediate care facilities (e.g. Avalon Memory Care) ● Ambulatory care institutions (e.g. Ambulatory Care Centers) ● Hospices (e.g. Hospice Care & Palliative Care, Inc.) ● Home health care institutions (e.g. CareGivers Home Health)

Physicians’ offices

Secondary Providers (Organizations that Provide Resources)

Educational institutions ● Medical schools (e.g. Johns Hopkins, University of Alabama at Birmingham [UAB]) ● Schools of public health (e.g. The University of North Carolina at Chapel Hill, Harvard) ● Schools of nursing (Presbyterian School of Nursing) ● Health administration programs (University of Washington, The Ohio State University)

Organizations that pay for care (third-party payers) ● Government (e.g. Medicaid, Medicare) (See Essentials for a Strategic Thinker 2–1, “What is

Government Health Care Insurance?” for an overview of public health insurance) ● HMOs and IPAs (e.g. United Healthcare) ● Insurance companies (e.g. Prudential, Metropolitan)

(Continued)

Ginter, Peter M., et al. The Strategic Management of Health Care Organizations, John Wiley & Sons, Incorporated, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/franklin-ebooks/detail.action?docID=5228460. Created from franklin-ebooks on 2023-09-29 01:09:17.

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46 strAtEgic mAnAgEmEnt of HEAltH cArE orgAnizAtions

● Businesses (e.g. Microsoft, Ford Motor Company) ● Social organizations (e.g. Shriners, Rotary Clubs)

Pharmaceutical and medical supply companies ● Drug distributors (e.g. McKesson) ● Drug and research companies (e.g. Bristol Myers Squibb) ● Medical products companies (e.g. Johnson & Johnson, 3M, GE)

Organizations that Represent Primary and Secondary Providers

National associations ● American Medical Association (AMA) ● American Hospital Association (AHA)

State associations (e.g. Illinois Hospital Association, New York Medi

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