5 Establishing Organizational Objectives iStock/Thinkstock Ah, but a man’s reach should exceed his grasp, Or what’s a heaven for? —Robert Browning Learning Objectives After reading this chapter, you should be able to do the following: • Describe the nature of objectives and the important role of—and management by—objectives in an HCO. • Discuss the characteristics of good objectives. • Delineate the types of objectives that are included in a strategic plan, and include examples of objectives for key result areas. • Provide an example of how to use data from an internal and external environmental analysis to set good objectives. • Explain how to perform a periodic review of objectives for measuring progress and making updates as needed. Section 5.1The Nature and Role of Objectives Introduction An HCO cannot achieve goals if none exist for the organization. Although this idea is quite simple, many people overlook it. To accomplish anything, an organization must have a clear understanding of what is to be accomplished. Strategic objectives are the tool by which organizations define their goals and sketch out a specific road map for achieving them. If we fail to set specific objectives, we simply waste our time and energy by going in circles. Later, we look back at what we accomplished and wonder where the time went. Just being busy and involved in activities does not mean that we are accomplishing what we need to accomplish. This chapter focuses on the need to establish objectives, the characteristics of good objec- tives, and the process of writing objectives. After the vision and mission of the HCO have been defined, and the internal and external analyses completed, relevant objectives are developed for the strategic plan. 5.1 The Nature and Role of Objectives Objectives can be defined as clear, concise written statements outlining what is to be accom- plished in key result areas in a certain time period, in measurable terms. Peter Drucker argues that “objectives are not fate; they are direction. They are not commands, but they are com- mitments. They do not determine the future, but they are the means by which the resources and energies of the operation can be mobilized for the making of the future” (Drucker, 1954, p. 102). As noted in Chapter 2, the words key results, goals, and targets often are used synonymously when talking about short- and long-term objectives. Whatever the label used, the idea is to focus on a specific set of target activities and outcomes to be accomplished. Think of the anal- ogy of the archer used in Chapter 2. An HCO administrator wants the whole organization aimed at a single target, just as an archer wants every arrow aimed at the bull’s-eye. People get confused and disorganized if they do not know where they are going. In large measure, the success or failure of an HCO is based on its ability to set goals, as well as on tools with which to measure progress toward those.

1. 5 Establishing Organizational Objectives
iStock/Thinkstock
Ah, but a man’s reach should exceed his grasp,
Or what’s a heaven for?
—Robert Browning
Learning Objectives
After reading this chapter, you should be able to do the
following:
• Describe the nature of objectives and the important role
of—and management by—objectives in an HCO.
• Discuss the characteristics of good objectives.
• Delineate the types of objectives that are included in a
strategic plan, and include examples of objectives for
key result areas.
• Provide an example of how to use data from an internal
and external environmental analysis to set good
objectives.
• Explain how to perform a periodic review of objectives
for measuring progress and making updates
as needed.

2. Section 5.1The Nature and Role of Objectives
Introduction
An HCO cannot achieve goals if none exist for the organization.
Although this idea is quite
simple, many people overlook it. To accomplish anything, an
organization must have a clear
understanding of what is to be accomplished. Strategic
objectives are the tool by which
organizations define their goals and sketch out a specific road
map for achieving them. If we
fail to set specific objectives, we simply waste our time and
energy by going in circles. Later,
we look back at what we accomplished and wonder where the
time went. Just being busy and
involved in activities does not mean that we are accomplishing
what we need to accomplish.
This chapter focuses on the need to establish objectives, the
characteristics of good objec-
tives, and the process of writing objectives. After the vision and
mission of the HCO have been
defined, and the internal and external analyses completed,
relevant objectives are developed
for the strategic plan.
5.1 The Nature and Role of Objectives
Objectives can be defined as clear, concise written statements
outlining what is to be accom-
plished in key result areas in a certain time period, in
measurable terms. Peter Drucker argues
that “objectives are not fate; they are direction. They are not
commands, but they are com-
mitments. They do not determine the future, but they are the
means by which the resources

3. and energies of the operation can be mobilized for the making
of the future” (Drucker, 1954,
p. 102).
As noted in Chapter 2, the words key results, goals, and targets
often are used synonymously
when talking about short- and long-term objectives. Whatever
the label used, the idea is to
focus on a specific set of target activities and outcomes to be
accomplished. Think of the anal-
ogy of the archer used in Chapter 2. An HCO administrator
wants the whole organization
aimed at a single target, just as an archer wants every arrow
aimed at the bull’s-eye. People
get confused and disorganized if they do not know where they
are going. In large measure,
the success or failure of an HCO is based on its ability to set
goals, as well as on tools with
which to measure progress toward those goals. Objectives can
be set at upper organizational
levels in key result areas, such as range of service offerings,
productivity, level of client satis-
faction, market share, profitability, financial resources, physical
resources, staff development
and attitudes, and commitment to social responsibilities as an
organization. Every healthcare
administrator should consider long-range objectives in each of
these areas.
Objectives are also needed in subunits, departments, or
divisions of an organization. Objec-
tives can be classified in various ways, such as by their nature,
which includes routine, prob-
lem-solving, and innovative, or by their function, which
includes team, personal, and budget
performance. Most important, all organizational objectives must

4. be consistent. In this way, a
department’s objectives should lead to accomplishing the
overall organization’s goals.
Objectives serve two fundamental purposes. First, they serve as
a road map. Objectives are
the results desired upon completion of the planning period. In
the absence of objectives, no
sense of direction can be attained in decision making. In
planning, objectives answer one of
Section 5.1The Nature and Role of Objectives
the basic questions posed in the planning process: Where do we
want to go? These objectives
become the focal point for strategy decisions.
Another basic purpose served by objectives is in the evaluation
of performance. The objec-
tives in the strategic plan become the yardsticks for evaluating
performance. It is impossi-
ble to evaluate performance without some standard by which
results can be measured. The
objectives become the standards for evaluating performance
because they are the statement
of results desired by the planner.
Management by Objectives
Objectives have sometimes been called the neglected area of
management. In many situa-
tions, the objectives that are set forth are unsound and therefore
lose much of their effective-
ness. Often, organizations fail to set any objectives at all. This
happens for at least six reasons:

5. 1. Many HCO managers fear accountability.
2. Many projects continue even when they no longer serve an
organization’s goals.
3. HCOs often undertake any activity for which money is
available.
4. Some HCO managers fear that a hard-nosed evaluation may
undermine humanitar-
ian instincts.
5. HCO managers must spend a great deal of time on activities
that do not immediately
further their goals (meeting with donors, fundraising, explaining
programs, and so
forth).
6. HCOs may have few, if any, financial report cards to tell
them how they are doing
(Thompson & Strickland, 1986).
Once the process of setting objectives has actually begun within
an organization, some of
these six goal-making deterrents may no longer be applicable.
Unfortunately, however, many
of these listed deterrents are applicable in many types of
organizational settings.
To counteract the failure to define organizational objectives, a
management tool called man-
agement by objectives (MBO) was developed by Peter Drucker.
This tool emphasizes the
need for setting objectives as a basic managerial process,
providing coordination of activities
at all levels of the organization.

6. For the HCO administrator, MBO translates into four basic steps
(Lumsdon, 1994). First, the
administrator and individual staff work out mutual objectives
that each staff member will
pursue in his or her area of responsibility. These objectives
should support the overall objec-
tives established by the HCO. Each staff member with
supervisory responsibilities, in turn,
holds similar meetings with his or her staff or volunteers. These
meetings should be held at
each management level so that objectives are fully coordinated.
Second, in addition to setting objectives at these meetings,
strategies or descriptions of actions
to be taken to accomplish each objective should be laid out.
Third, follow-up meetings should
be held periodically to monitor progress toward reaching
objectives, identify problems, and
mutually determine methods to correct any difficulties. The
final step involves an overall eval-
uation of goal accomplishment for individuals and units at
year’s end or the end of the plan-
ning period. From this, new objectives for the upcoming
planning period can be determined.
Section 5.2The Characteristics of Good Objectives
Alternatives to Management by Objectives
MBO may be best understood by contrasting it with the
following four alternative approaches
to management that all lack a sense of direction (Wayne State
University, 2013).
Management by extrapolation—This approach relies on the

7. principle, “If it ain’t broke,
don’t fix it.” The basic idea is to keep on doing about the same
things in about the same ways
because what we are doing (1) works well enough and (2) has
gotten us where we are. The
basic assumption is that, for whatever reason, “Our act is
together, so why worry? The future
will take care of itself and things will work out all right.”
Management by crisis—This approach to administration is
based on the idea that the
strength of any really good manager is an aptitude for solving
problems. Because there are
plenty of crises around—enough to keep everyone occupied—
managers ought to focus their
time and energy on solving the most pressing problems of
today. Management by crisis is,
essentially, reactive rather than proactive, and it is the events
that already have occurred that
dictate management decisions.
Management by subjectives—The subjectives approach to
management occurs when no
organization-wide consensus or clear-cut directives exist on
which way to head and what to
do. Each manager translates this to mean “do your best to
accomplish what you think should
be done.” This is a “do your own thing the best way you know
how” approach. This is also
referred to as “the mystery approach.” Managers are left on
their own with no clear direction
ever articulated by senior management.
Management by hope—In this approach, decisions are
predicated on the hope that they will
work out and that good times are just around the corner. They

8. are based on the belief that if
you try hard enough and long enough, then things are bound to
get better. Poor performance
is attributed to unexpected events and the fact that decisions
always have uncertainties and
surprises. Much time, therefore, is spent hoping and wishing
things will get better.
All four of these approaches represent variations of managerial
muddling through. Absent is
any effort to calculate what effort is needed to influence where
an organization is headed and
what its activities should be to reach specific objectives. In
contrast, MBO is much more likely
to achieve targeted results and show a sense of direction.
5.2 The Characteristics of Good Objectives
For objectives to accomplish the purpose of providing direction
and a standard for evaluation,
they must possess certain characteristics. The more these
attributes are possessed by a given
objective, the more likely the objective will achieve its basic
purpose. Sound internal objec-
tives (as opposed to external objectives for public consumption,
which may have to be more
generalized) should have the following characteristics:
• Objectives should be clear and concise: Objectives should
be clear to everyone in the
organization. There should not be any room for
misunderstanding what results
are sought in a given objective. The use of long statements with
words or phrases

9. Section 5.2The Characteristics of Good Objectives
that may be defined or interpreted in different ways by different
people should be
avoided.
• Objectives should be in written form: This helps solve two
problems: unclear, inef-
fective communication and the altering of unwritten objectives
over time. Everyone
who has played the game “gossip” realizes that oral statements
can be altered unin-
tentionally in the act of being spoken. Written statements avoid
this problem and
permit ease of communication. Written statements also obviate
the human tendency
to want or appear to “look good,” which is often at the expense
of actual perfor-
mance. Unwritten objectives can be altered to fit current
circumstances.
• Objectives should name specific results in key areas: The
key areas of an organization
for which objectives are needed can include the range of service
offerings, productiv-
ity, level of client satisfaction, market share, profitability,
financial resources, physi-
cal resources, staff development and attitudes, and commitment
to social respon-
sibilities as an organization. Specific results, such as “5,000
patients treated for the
next year” rather than “a high level of patients served” or “an
acceptable level of
patient services,” should be used to avoid doubt about what
result is sought.

10. • Objectives should be stated for a specific time period:
Objectives should be stated for
specific time periods. Objectives can be set for a short-run,
nearly immediate time
period, such as six months to one year. Building on longer and
longer time frames,
the accomplishment of short-term objectives should lead to the
successful comple-
tion of longer-run objectives. The time period specified
becomes a deadline for
producing results and also sets up the final evaluation of the
success of a strategy.
• Objectives should be stated in measurable terms:
Objectives must be measurable. Con-
cepts that defy precise definition and qualification should be
avoided. Patient satis-
faction is an example of a concept that is important, but which
in itself is difficult to
define and measure. If a planner felt patient satisfaction was a
concept that needed
to be measured, a measure or measures (possibly indirect in
nature) would have to
be developed. An objective related to patient satisfaction that
would be capable of
quantification might be stated as follows: To have at least 85%
of our constituents
rate our HCO as the best organization in the area in our annual
survey. A phrase such
as improve staffing is not only unclear and nonspecific, it
cannot be measured. What
does improve mean? Increase the number of staff by 5%? By
40%? In what areas? If
the statement is quantified as “increase the number of full-time
physical therapists
by 10% within the next 18 months,” then it can be objectively

11. measured. The accom-
plishment or failure of such a stated objective can be readily
evaluated.
• Objectives at each administrative level must be consistent
with overall organizational
objectives and purpose: The objectives developed for each unit
of the organization
must be consistent with the overall objectives of the HCO. This
idea has been previ-
ously stated, but it must be continually reemphasized because of
the need for orga-
nizational unity.
• Objectives should be attainable, but of sufficient
challenge to stimulate effort: Objec-
tives need to be attainable but also challenging. Two problems
can be avoided if this
characteristic is achieved. The first problem that can be avoided
is the frustration
produced by objectives that cannot be attained at all or cannot
be attained within
the specified time period. For example, large-percentage
increases in patients served
at home can be unrealistic, as goals, if the home healthcare
agency already has an
unusually large patient load. The desirability and likelihood of
substantial increases
become doubtful. The other problem is that setting easily
attainable objectives that
require only minimum effort results in positive performance
evaluations because
Section 5.2The Characteristics of Good Objectives

12. goals are too easily accomplished. In reality, the evaluations
only camouflage lacklus-
ter performance that is well short of potential. Easily attainable
goals fail to maxi-
mize the contribution of a given strategic plan.
SMART Objectives
One approach to writing objectives is to use the SMART
philosophy (Wayne State University,
2013). SMART is an acronym for guiding the development of
measurable goals. As indicated
by the following list, each written objective should be
• Specific
• Measurable
• Achievable
• Relevant
• Time-oriented
Specific
Specific answers two questions: What is to be done? and How
will you know it is done? It
also describes the results (end product) of the work to be done.
The description is written in
such a way that anyone reading the objective will most likely
interpret it the same way. For
example, Reduce dosage errors to less than 1% is a specifically
stated goal.
Measurable
Measurable answers this question: How will you know it meets
expectations? Measureable
also defines the objective, using assessable terms (quantity,
quality, frequency, costs, dead-
lines, and so forth). Measurable refers to the extent to which

13. something can be evaluated
against a standard. An objective with a quantity measurement
uses terms of amount, percent-
ages, and so forth. For example, measurable could mean the
percent of errors, compared to
the objective, of less than 1%. A measurement also could be a
daily or weekly consideration.
Achievable
Achievable answers these three questions: Can it be done? Can
the measurable objective be
achieved by the organization? Can it be done given the time
frame, opportunity, and resources?
These considerations should be included as part of the written
objective if they will be a factor
in the achievement of the objective. For example, if an error
rate is currently at 5%, decreasing
that rate to less than 1% may not be achievable during a given
time period because of the size
of the decrease specified.
Relevant
Relevant answers these four questions: Should it be done? Why
should it be done? What
will be the impact, if it is done? Is the objective aligned with
the organization’s mission? For
Section 5.2The Characteristics of Good Objectives
example, Dosage error rates are extremely important to
providing quality care is a relevantly
stated goal.
Time-oriented

14. Time-oriented answers this question: When will it be done? It
refers to the fact that an objec-
tive has end points and check points built into it. Sometimes a
task may only have an end
point or due date. Sometimes an objective has several
milestones or check points to help you
or others assess how well something is going before it is
finished so that corrections or modi-
fications can be made as needed to ensure that the end result
meets expectations. This means
including a time frame in the stated objective, such as Reducing
the dosage error rate to less
than 1% by the end of 2019.
Objectives that meet such criteria are much more likely to serve
their intended purpose. The
resulting statements can then serve as the directing force in the
development of strategy.
Examples of Effective Objectives
Table 5.1 provides examples of poorly presented, or weak,
objectives, which are contrasted
with examples of these same core objectives now strengthened,
or better presented, with the
inclusion of more precise information to effectively
communicate measured goals and the
organization’s desired results.
Table 5.1: Contrasting presentations of the same objective
Weaker presentation of
objectives
Remarks to transform the weaker
presentations of objectives into stronger

15. presentations of objectives
Stronger presentation of
objectives
Our objective is to lower
the rate of medication
errors.
How much is lower? The statement is not
subject to measurement. What criterion or
yardstick will be used to determine if and
when actual error rates are equal to those
desired? In addition, no deadline is specified.
Our objective is to lower
our medication error rate
by 10% within 12 months.
Our objective is to increase
our occupancy rates.
How much? A single patient-per-day increase
will meet that objective, but is that really the
desired target?
Our objective this calendar
year is to increase occu-
pancy rates by 5%.
Our objective is to boost
advertising expenditures
by 15%.
Advertising is an activity, not a result. The

16. advertising objective should be stated in
terms of what result the extra advertising is
intended to produce.
Our objective is to boost
patient revenues by 10%
in each of the next five
years with the help of a
15% annual increase in
advertising expenditures.
Our objective is to be the
best HCO of its type in our
area.
Not specific enough; what measures of best
are to be used? Number of patients served?
Level of reimbursement? Number of new
programs started? Services offered? Number
of professional staff ?
We will strive to become
the number one HCO of its
kind in the metropolitan
area within five years in
terms of the number of
patients served.
Section 5.3The Types of Objectives Included in a Strategic Plan
Seven Rules for Writing Effective Strategic Objectives
What follows are seven rules for writing effective strategic
objectives.

17. 1. Objectives should include an action verb, because the
achievement of an objective
must come as a result of specific action.
2. Each objective should specify one major result to be
accomplished.
3. An objective should have a target date for accomplishment.
4. An objective should relate directly to the mission statement
of the group or orga-
nization. For example, a local facility of a national nursing
home chain should not
write an objective outside the scope of its own mission
statement or one that per-
tains more to the mission statement of the parent organization.
This may seem obvi-
ous, but groups often commit themselves to projects for which
they have neither
responsibility nor authority.
5. An objective must be understandable to those who will be
working to achieve the
desired results.
6. An objective must be possible to achieve.
7. An objective should be consistent with a parent
organization’s policies and practices.
Refer to Chapter 3, Table 3.2, which lists sample HCO mission
statements. Imagine that you
have been asked by the CEO of a small, rural hospital to
evaluate its strategic objectives. The
hospital’s mission statement, as stated in Table 3.2, is “To
improve the quality of life of all we
serve through excellence in healthcare delivery emphasizing
compassionate, personal care.”

18. The CEO and his or her planning team have come up with the
following three objectives.
Evaluate the effectiveness of each of these objectives in relation
to the guidelines presented
in the preceding list of seven rules for writing effective
strategic objectives.
• Objective 1: We intend to improve the quality of the
healthcare we provide.
• Objective 2: We intend to expand the scope of our
services to include a birthing cen-
ter, neonatal intensive care, and a children’s orthopedic unit.
• Objective 3: We intend to control costs by automating our
phone system, eliminating
the need for several patient service representatives.
5.3 The Types of Objectives Included in a Strategic Plan
Strategic plans for HCOs usually focus on at least four types of
objectives: (1) services offered;
(2) staffing; (3) services reimbursement, donations, and
funding; and (4) constituents served.
However, objectives should be established in all key result
areas of the HCO’s operations. Key
result areas are those activities that are most likely to impact
the performance of the organi-
zation. They are the few things that must go right if the HCO is
to be effective and thrive. For
example, key result areas for a hospital or clinic could include
the following:
• Percentage of doctors who are board-certified
• Number and quality of services offered
• Number of patients treated by inpatient/outpatient

19. services
• Successful surgery and treatment rates
• Financial condition/budget status/surplus
Section 5.3The Types of Objectives Included in a Strategic Plan
• Status of physical facilities
• Quality
• Productivity
• Patient satisfaction
• Innovation
• Percent occupancy rate
• Number of physicians by specialty
• Level of professional staffing
The preceding list of key result areas is lengthy, and it may lead
to an HCO’s establishment of,
ultimately, an unmanageable number of strategic objectives.
One author therefore suggests
using only five strategic objectives so as to have a more limited
and manageable number of
key result areas to work with. The idea is to reduce the number
of strategic objectives, which
leads to fewer key result areas on which to focus. Based on this
suggestion, each of five key
result areas is linked with a strategic objective that provides
direction by naming a specific
result for the identified key result area of an HCO, as shown in
the following example:
1. Safety: Decrease the number of never-should-happen events
to zero.
2. Quality: Decrease inpatient mortality to zero.
3. Satisfaction: Increase patient satisfaction to 99th percentile.

20. 4. People: Decrease turnover rate to zero.
5. Finance: Increase net margin to 20% (Regan, 2012).
The reasoning for the use of only five strategic objectives is as
follows: First, a powerful vision
can be created through five strategic objectives, and this vision
will serve as a rallying point
for the entire organization. Second, the organization is afforded
tremendous flexibility in
changing the strategies and tactics each year to achieve the
stated objectives. Third, everyone
in the organization will easily know in what way what they do
each day helps achieve the
organization’s objectives. Finally, the consistency in objectives
from year to year will drive the
organization to the relentless pursuit of perfection, and this
consistency becomes immersed
in the organizational culture (Regan, 2012).
In addition to overall objectives that are to be accomplished in
the long term, a set of short-
term objectives will need to be developed. Short-term objectives
support the attainment of
long-term objectives. For example, to have a 1% decrease in
supply-cost each year supports
a long-term objective of decreasing supply cost by 5% over the
next five years. Short-term
objectives are stated only for the operating period, normally one
year, whereas long-term
objectives often span five to ten years. For example, five-year
objectives can be set in areas
such as clients served, programs offered, fundraising, services
offered, and so forth. While
the definition of long term varies, HCOs should be planning at
least as far into the future as
present-day obligations commit them. For example, the planned

21. construction of a new build-
ing with a 45-year life means that the organization should be
looking 45 to 50 years into the
future with regard to the effective use of the facility.
In setting objectives, we first state them in terms of what we
want to accomplish, but as we
develop the strategy we may discover that we cannot afford
what we want. The available
resources committed to a given program or service may not be
sufficient to achieve a stated
objective; if the planning process is resource controlled, then
the objective must be altered.
It must be remembered, as Peter Drucker has argued, that
“objectives are not fate;” but “they
Section 5.3The Types of Objectives Included in a Strategic Plan
are direction”; objectives “are not commands,” but they do
become commitments (Drucker,
1954, p. 102). Planners should avoid falling into the trap of
thinking that objectives, once they
are set, cannot or should not be altered.
Examples of objectives for key result areas, including
productivity, funding, and patient/
client, are presented in the following three subheadings.
Productivity Objectives
Increasing levels of productivity and cost-effectiveness are
essential to the vitality of HCOs,
such as home HCOs in managed-care environments. New
staffing patterns, the use of teams
to improve care plans, and new information systems are often

22. critical to achieving improved
productivity (Regan, 2012). Objectives for improvements in
productivity may be stated
numerically or as a percentage of the total number. If the
objectives are stated in percentages,
they also need to be converted to numbers for budgeting. The
way objectives are stated must
reflect what the organization can realistically expect to attain
under a given plan.
Productivity objectives may resemble the following:
• Patient care services: Reduce the average number of home
visits per patient by 10%
for the coming 12 months over last year’s level.
• Business office operations: Reduce paperwork expenses
by 15% within the next 24
months when compared with the most recent 24-month period.
Funding Objectives
Funding and reimbursement for services rendered are vital
aspects of any HCO’s operations,
especially in an era when financial sources are drying up. While
seeking increased revenues
simply for the sake of revenues should not be the only end
pursued, the need to increase rev-
enues is an inescapable fact of life for an HCO to deliver its
services. The issue of continued
survival offers a very practical reason for developing a specific
statement about funding tar-
gets. Getting specific about desirable end results forces the
planner to estimate the resources
needed to underwrite specific programs and services.
The U.S. healthcare cost crisis is due to the present-day

23. structure of the healthcare system,
the fact that third parties rather than patients pay the bill, and
the longstanding convention
that most reimbursement plans pay for procedures rather than
results. Michael Porter and
Thomas Lee (2013) believe that the goal of HCOs needs to be
this: to deliver better value
rather than to reduce costs and increase profits. Value is defined
as the “health outcomes
achieved that matter to patients relative to the cost of achieving
those outcomes” (Porter &
Lee, 2013, p. 52). The complexity of the problem is beyond the
scope of this textbook. Whether
it is Porter and Lee’s value proposition or a traditional
reduction of cost, the debate over the
nation’s healthcare costs will likely continue.
A statement of whether resources will be available cannot be
made without a break-even
analysis of the revenue versus the cost of providing …
4 Environmental Analysis
Charles Dharapak/Associated Press
Organisations don’t exist in a vacuum. They are intricately
connected to an
outside world with a constantly changing landscape.
—The Happy Manager
Learning Objectives
After reading this chapter, you should be able to do the

24. following:
• Describe the environmental forces that create change and
can influence an HCO’s strategic planning.
• Discuss the impact of legislation on HCO operations and
strategic planning.
• Identify the main forces referred to in the five forces
model of industry analysis.
• Explain why an HCO should continue to assess external
opportunities and threats.
• List different benchmarks that can identify an HCO’s
internal strengths and weaknesses.
• Explain the connections between an HCO’s strengths,
weaknesses, and distinctive competencies.
• Name the advantages of the Integrated Practice Unit (IPU)
as a healthcare delivery method.
Section 4.1External Analysis of Dominant Environmental
Driving Forces
Introduction
This chapter discusses the importance and the components of an
environmental analysis as
part of the strategic planning process for an HCO. This chapter
introduces an external analysis
that uses a PESTLE framework for identifying the elements of
the external environment. This
chapter then reviews legislation and governmental initiatives,

25. which have a dramatic impact
on HCOs. Next, “Porter’s five forces” model, which also is
known as the five forces model of
industry analysis, is explained and applied to an HCO. Finally,
this chapter discusses internal
and external analyses and the use of a SWOT analysis, followed
by an examination of how
resources, costs, and distinctive competencies affect strategic
planning efforts.
4.1 External Analysis of Dominant
Environmental Driving Forces
It is vital for an HCO to gauge the external environment within
which it operates. This, in fact,
should be standard practice for all organizations. Virtually
anything that can happen prob-
ably will happen, eventually. We truly have no certainty about
what things will be like in the
future, in spite of our attempts to make predictions or forecasts.
Still, an HCO cannot afford to
let generalized eventualities and uncertainties keep it from
being active in strategic planning,
and changing in response to environmental demands.
PESTLE is an acronym to describe the elements of the external
environment that impact
an HCO’s planning process. These elements require specific
analysis about their current or
potential impact on the organization’s planning and operations.
PESTLE stands for politi-
cal, economic, sociocultural, technological, legal and eco-
environmental forces, which exert
strong influences on how an HCO crafts and executes strategic
plans. Figure 4.1 shows the
elements of PESTLE.

26. These elements also interact with each other to create additional
ramifications. Consider
medical waste. Medical waste first came to the attention of the
general public, years ago,
when it washed up on New Jersey beaches. Because of the
media exposure of this and other
events pertaining to undesirable disposal practices, as well as
the fear of AIDS, public hysteria
resulted and regulatory officials were under pressure to develop
comprehensive regulations
to prohibit such occurrences. The Medical Waste Tracking Act
of 1988 was passed, requiring
the federal Environmental Protection Agency (EPA) to begin an
investigation to determine
whether federal legislation was necessary. In 1991 the EPA
provided their findings, which led
to federal regulations on medical waste disposal.
The Occupational Safety & Health Administration (OSHA)
began to fine waste generators for
improper disposal practices within their facilities, and most
states have adopted some type
of regulation pertaining to infectious-waste disposal
requirements. This, in turn, led to an
examination of waste-disposal methods technology, such as
autoclave and incineration, and
the documentation needed to show that wastes were being
disposed of properly. This also
created the need for state-of-the art incineration techniques and
facilities. At any given time,
some or several of the forces may be driving change in the
healthcare industry. It is important
to determine which force is the driving force in creating a
change in the environment.

27. Section 4.1External Analysis of Dominant Environmental
Driving Forces
Figure 4.1: PESTLE framework for external analysis
Several external forces influence how an HCO crafts and
executes a strategic plan. The forces are grouped
by category.
f04.01_MHA 626.ai
Sociocultural:
demographics,
education, health
perspectives, etc.
Technological:
New discoveries,
research,
obsolescence, etc.
Legal: Healthcare
legislation,
consumer
protection, etc.
Eco-environmental:
Waste disposal,
energy consumption,
sustainability, etc.

28. Economic:
Economic cycles,
unemployment,
inflation, etc.
Political:
Governmental
policies, spending,
etc.
HCO’s
Planning
Process
The only way we can manage change is to constantly monitor
the environment within which
an organization operates. Other examples of PESTLE forces for
an HCO include trends in
Medicare or Medicaid funding; the Affordable Care Act;
governmental regulations on funding
retirement programs; the labor supply for healthcare
professionals; interest rates for capital
improvements; better-educated clients/patients, who expect to
be included in decisions on
their healthcare; greater emphasis on the marketing of
healthcare services; the fast pace of
technological change; and so forth.
The external analysis is where we look at past and current
developments external to an HCO’s
operations. From this analysis, we identify trends and, in effect,
take the pulse of the environ-

29. ment in which the HCO operates. An HCO must be aware of
characteristics of environmental
conditions affecting it, and be vigilant about changes that may
occur in this environment.
Section 4.1External Analysis of Dominant Environmental
Driving Forces
Numerous possible shifts can occur to affect the organization in
categories such as patients/
clients; the general economy; governmental regulations at
federal, state, and local levels; and
sociocultural trends in demographics and lifestyles, among
others. Many HCO administrators
have discovered their failure to understand and heed the
implications of the environment on
their organization’s actions, even when those implications were
obvious, such as a shift in
population and businesses from the organization’s current urban
location to suburban areas.
Even without a formal organizational system to monitor the
environment and the changes
happening within it, HCO executives must exercise vigilance to
detect and use information
from the environment in formulating strategy.
Many of the environmental factors influencing the organization
and its administration will
change. This is a given. Few factors stand still for long, so
constant study of the environment
is necessary. Thus, the HCO administrator should expect change
and be receptive to it. Many
other driving forces are present. Various industries will have
different forces that help deter-

30. mine the direction of the industry and these forces will have
different magnitudes of impor-
tance from one industry to another. Table 4.1 provides a sample
environmental analysis as it
might apply within an HCO.
Table 4.1: Sample PESTLE impact analysis for an HCO
Political Economic
Medicare/Medicaid reimbursement—eligibility and
reimbursement amounts
Economic trends—increased or decreased employ-
ment and increased or decreased insurance
coverage
Zoning regulations—the types of businesses located
near the HCO
Taxation—changes in tax structures and changing
disposable income for elective procedures
Governmental relations—the lobbying effects of
various healthcare groups
Market and distribution trends—increased avail-
ability of urgent care centers and satellite units
Sociocultural Technological
Lifestyle trends—healthier lifestyles with more
emphasis on prevention
Electronic health records—increased need for train-
ing and record keeping

31. Aging population—increase in geriatric patients
and greater dependence on Medicare/Medicaid
reimbursements
Value-enhancing IT platform—more and better
technology availability and increased cost
Patient education—better-educated patients asking
more pertinent questions and doing research on
treatment options
New diagnostic devices—better patient care and
increased usage cost
Legal and Healthcare Legislation Eco-Environmental
Affordable Care Act—new mandates and informa-
tion requirements
Waste disposal—verification of hazardous waste
disposal
Health Insurance Portability and Accountability Act
(HIPAA)—patients’ ability to keep current coverage
Energy consumption—higher energy consumption
leading to higher operating costs
State Children’s Health Insurance Program (CHIP)—
eligibility and reimbursement schedules
Sustainability—ability to maintain existing and
future operations

32. Section 4.2Legislative Processes and Implementation Issues
4.2 Legislative Processes and Implementation Issues
How legislation affects both planning and operations is an
external factor that requires con-
tinuous monitoring. Federal and state processes may vary,
depending on individual state
rules and regulations concerning legislation.
The Federal Legislative Process
At the national level, the legislative process typically involves
the following steps and
policymakers:
1. A bill is introduced by a congress member.
2. The bill goes to the appropriate committee for review and
hearings. The major com-
mittees with jurisdiction over health issues are the following:
i. Senate Finance: Medicare, Medicaid, and the Children’s
Health Insurance
Program (CHIP)
ii. Senate Health, Education, Labor, & Pensions: Most agencies
in HHS; public
health and health insurance statutes
iii. House Ways and Means: Medicare
iv. House Energy and Commerce: Medicare (Parts B, C, D),
Medicaid, CHIP, public
health
3. Once the committee approves the bill it is sent to the floor of
the House and Senate

33. for a vote, and it must pass in both chambers to become law.
4. If the bill passes both chambers, the President has 10 days to
sign the bill or veto it.
If the President does nothing, it becomes law.
Federal regulations, also known as rules, are issued by agencies
and these regulations have
the force of law. Agencies issue a notice of a proposed rule to
add, change, or delete regulatory
text, which is followed by several stages of review, including a
public comment period. The
final revised rule based on public comment must allow 60 days
to pass before the rule takes
effect (Aetna, 2013).
Landmark Health Legislation in the United States
Legislation pertaining to healthcare has a long history in the
United States (The Associated
Press, 2010). Federal involvement in healthcare began with “An
Act for the Relief of Sick and
Disabled Seamen” in 1798. Since then, healthcare legislation
has been passed at the federal
level, providing care for Native Americans, maternal and child
services, and veterans. The
most notable of these acts and the ones that have the most effect
on healthcare planning
include the following:
• Medicare and Medicaid (1965) Medicare is a federal
program that provides health
insurance for those over age 65. Medicare is one of the largest
purchasers of health-
care in the United States. The coverage and reimbursement
decisions made by
Medicare affect the ways providers operate and have a major

34. impact on the health
Section 4.2Legislative Processes and Implementation Issues
services industry. Some Medicare coverage and reimbursement
decisions (such as
diagnosis-related groups, or DRGs) have been adopted by the
private sector.
Medicaid is a program run jointly by the federal and state
governments to provide
health insurance for low-income individuals who meet
eligibility requirements.
A recent trend in Medicaid is for the federal government to turn
all authority and
responsibility for the program to the states.
• Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA). This act gives
employees the right to continue the health insurance coverage
their employer pro-
vides after leaving the job. It also made hospice care a
permanent part of Medicare
and Medicaid.
• Health Insurance Portability and Accountability Act of
1996 (HIPAA). This law
strengthened the portability of health insurance that was first
authorized under
COBRA. This law also encouraged the use of medical savings
accounts, improved
access to long-term medical care, and strengthened privacy laws
concerning
health records.

35. • State Children’s Health Insurance Program of 1997
(CHIP). This program helps
provide medical care to children in low-income families that are
not eligible for
Medicaid.
• Patient Protection and Affordable Care Act of 2010.
Known as the Affordable Care
Act, this law provides an array of changes in healthcare,
including coverage man-
dates, acceptance for insurance regardless of medical history,
reduction in spending
on Medicare, and more restrictions on health insurance
providers. However, many
parts of the act are being challenged and delays in
implementation have been given
to some organizations. This act will have a major impact on who
receives healthcare
and how it is administered for years to come. The changes being
brought about by
this act are profound and occurring rapidly with respect to the
method by which
providers will be paid and the imperative to improve the value
of services provided.
The Effects of Reform on HCO Strategy
HCOs must become familiar with the following four key
concepts of current healthcare reform
that will affect strategic planning:
1. Value-based payment
2. Accountable care organizations (ACOs)
3. Bundled payment
4. Bending the cost curve

36. Value-based Payment
Historically, the model of reimbursement for the provision of
healthcare services has been
fee-for-service: a health provider (an organization or individual)
is paid by the volume of
procedures or services provided. This payment mechanism tends
to incent providers to order
more tests, procedures, and hospitalizations than may be
necessary to appropriately care
for patients. The fee-for-service model has been blamed for the
rapid increases in health-
care costs without a concomitant improvement in quality of
care. A key component of health
reform is replacing the fee-for-service model of payment with
value-based payment.
Section 4.2Legislative Processes and Implementation Issues
Under value-based payment, which also is known as pay-for-
performance (P4P), provid-
ers receive payment for service based on their performance or
the potential outcomes of the
service. Tying payment to measurable outcomes in reducing
costs and improving quality is
the “value” proposition sought by healthcare reform. Those
providers who can lower costs
and improve quality of outcomes, resulting in improved
community health, will be distin-
guished as value-based providers. In some payer arrangements,
beneficiaries will experience
higher out-of-pocket costs if they receive care from a provider
that is not designated as value-
based. There will also be penalties for failure to meet
performance targets; for example, the

37. withholding of payments to acute-care hospitals that readmit a
patient within 30 days with
the same complaint.
As value-based payment methods evolve, every provider type
will likely be affected by some
form of value-based payment. Understanding the plans of local,
state, and federal payer orga-
nizations to implement some form of value-based payment and
analyzing how those plans
will affect the HCO will be critical in the strategic planning
process (Health Care Incentives
Improvement Institute, 2012).
Accountable Care Organizations
Although ACOs take many forms and involve many different
providers, all are based on a
group of providers that work together to integrate, coordinate,
and deliver a full continuum of
care to a defined population of patients. These providers are
accountable to both the patients
and the payer organization for delivering quality care in a cost-
effective manner.
Key features of an ACO are the aggressive use of primary care
physicians to distribute preven-
tive care; care planning; and patient management practices that
minimize high-cost hospital
stays through better coordination of community and outpatient
settings. This is an important
development in the drive to cut healthcare costs and creates
more emphasis on prevention.
Although an ACO can receive payment through a variety of
methods, payment for most will
be linked to quality improvements that also reduce overall
costs. Payment will be based on

38. reliable and progressively more sophisticated performance
measures that support improve-
ment and savings.
A significant consideration by an HCO in the strategic planning
process will be participa-
tion in ACOs and other collaborative arrangements that improve
quality and reduce costs,
whether these arrangements are developed by that HCO, a
competing HCO, a collection of
physicians, or a payer organization. Providers across the
continuum must maintain a degree
of flexibility to remain viable and competitive (Centers for
Medicare & Medicaid Services,
March 2013).
Bundled Payment
Bundled payment (also known as an episodic or episode-based
payment) is a method
of payment in which a single lump sum is paid for all services
related to a particular treat-
ment or condition (episode of care), such as a hip replacement
or a coronary arterial bypass.
Services included in the single payment may encompass
physician charges, hospital charges,
ancillary charges, outpatient, and even pre- and post-acute
services.
Section 4.2Legislative Processes and Implementation Issues
Bundled payment is an alternative to capitation and fee-for-
service payment models, as it
is designed to reduce the lack of coordination among healthcare
providers and the dupli-

39. cation of care prevalent with fee-for-service and capitation
arrangements. Under a bundled
payment method, the organization that receives the payment
must negotiate fees and costs
with the respective participants and services in the bundle. This
results in an increased
emphasis on improved coordination, reduction of redundant
services, and reduction of costs
because the organization may be at financial risk for amounts
that exceed the bundled pay-
ment. Quality measures will pay an important role in
determining the value of the bundled
payment program.
Bundled payment is seen by the Centers for Medicare and
Medicaid Services (CMS) as the
most effective payment method to reduce overall healthcare
spending. Preparing for bundled
payment will be essential as an HCO develops a strategic plan.
Bundled payment represents
a fundamental shift in payments because this method transfers a
great deal of risk directly
to the HCO. This method will challenge an HCO to examine its
internal operations, identify
cost-effective behaviors, embrace evidence-based medicine, and
work collaboratively with
physicians and other HCOs to reduce redundancy and improve
patient outcomes (Centers for
Medicare & Medicaid Services, 2013).
Bending the Cost Curve
For the last 20 years, healthcare costs have risen at a fairly
steady rate of 9% per year—
an unsustainable ascent (The Washington Post, 2012). The
object of the bending-the-cost-
curve payment methodology is to alter the current trajectory of

40. healthcare costs nationwide.
Changes in payment methodologies such as value-based
reimbursement, bundled payment,
and care delivery methods encompassing better coordination
and preventive strategies will
be essential in controlling costs over the long term.
No matter where a provider falls along the healthcare
continuum, each will be expected to
deliver value. For acute-care hospitals, that could mean
decreasing readmissions and reduc-
ing duplicate and unnecessary tests and procedures. For skilled
nursing facilities or home
healthcare agencies, that might mean better management of
unnecessary hospital admis-
sions or collaborating with acute-care hospitals to address their
readmission and redundant
services issue. For patients, it may mean fewer contacts with a
physician but greater contact
with a team of healthcare professionals that work under a
physician’s supervision. Teams
may be made up of physician assistants, RNs, pharmacists,
nutritionists, physical therapists,
and mental health professionals. Providers will place greater
emphasis on preventive care,
and care navigators (also referred to as patient care managers or
care coordinators) will be
in regular contact with patients to advise and encourage
preventive care and healthier life-
styles. The result of these efforts will ultimately be measured in
terms of outcomes because
outcomes will inevitably dictate payment.
Value will not be achieved in isolation. Improving quality and
reducing costs will require
cooperation and collaboration that has been largely absent from

41. this industry. The historical
practice of discharging from one venue to the next with little
regard for outcomes or perfor-
mance of the admitting organization will, inevitably, be
replaced by care management via an
integrated continuum (Antos, et al., 2013).
Section 4.3The Five Forces Model of Industry Analysis
As you begin your strategic planning process, it will be
important for you to know what the
providers on either side of you, along the continuum, from low
acuity to high acuity, are doing
(Promise Healthcare, 2012). What reform initiatives are being
explored in your community
and by your state? What collaborations will be necessary for
your HCO to improve internal
capacity and be financially rewarded under value-based
payment? As every HCO is unique and
no cookie-cutter approach will work for everyone, putting
Band-Aids on existing procedures
will not be enough. The voyage for every healthcare provider
will be toward greater value.
4.3 The Five Forces Model of Industry Analysis
The forces of competition greatly influence the strategy
formation and market-opportunity
decisions of an organization. Although each industry has its
own unique characteristics, five
main forces are representative of the actual driving mechanisms
of any given industry and
are often referred to as the five forces model of industry
analysis. These five forces, shown in
Figure 4.2, include the following:

42. 1. The industry itself and the competitive decisions and
activities engaged in by each
company
2. Consumer/buyer composition
3. Supplier composition
4. The possibility of new entrants
5. Availability of good product substitutes
Figure 4.2: The five forces model of industry analysis
Though there are unique characteristics in any industry, five
main forces drive all industries.
f04.02_MHA 626.ai
Dynamic
activity of the
industry
Consumer/buyer
composition
Availability of
substitutes
Competitive
rivalry
Possibility of new
entrants
Supplier
composition

43. Source: Adapted from Michael E. Porter, How competitive
forces shape strategy. Harvard Business Review, 57, No. 2
(March–April 1979), p. 141.
Section 4.4Assessing Environmental Opportunities and Threats
The industry itself and the individual companies within the
industry are constantly involved in
dynamic interplay in an attempt to build a successful
competitive edge over one another. The
success of one organization’s strategy in accomplishing this is
based in large measure on the
strategies of the other organizations. Constant monitoring of
these interdependent strategic
maneuvers is required to make the adjustments necessary to
improve competitive position
and achieve market success. Multiple views of the industry are
necessary.
Consumer/buyer composition can range from a few, high-
volume purchasers to a large num-
ber of low-volume purchasers. In one instance, losing a few
customers can be the difference
between success and failure, while, at the other extreme, losing
the same number of custom-
ers has essentially no impact. Most firms try to minimize the
number of customers who can
exert an adverse effect on their business.
Supplier composition also has an important influence on the
competing position of individual
organizations. The relative importance of the goods or services
they supply will determine

44. the strength of their competitive influence over firms in the
industry. They can have a positive
or negative impact on profit margins, inventory levels, product
quality, and prices.
The possibility of new entrants into the market is a constant
threat to altering market share,
production capacity, and supply distribution within the industry.
This threat can be minimal
when there are strong barriers to entry, such as strong customer
loyalty, large capital require-
ments, difficulty in establishing distribution channels, and
strong response of current mar-
ket participants. When entry barriers are weak or the expected
response of existing firms is
weak, then the possibility of entry is stronger.
The fifth force in the model is the availability of good product
substitutes. This is a major threat
to existing firms when high-quality substitutes exist in ample
quantity at competitive or com-
parable prices. An example of such a substitute in healthcare
might be acupuncture for more
traditional medical treatments.
4.4 Assessing Environmental Opportunities and Threats
Recall, from Chapter 2, that a SWOT analysis involves
analyzing internal strengths and weak-
nesses and external opportunities and threats. Opportunities and
threats related to the exter-
nal environment are analyzed to determine if any action
(strategy) is needed to deal with
them. For example, a nursing center may notice the move
toward hospice programs for the
terminally ill. While the hospice philosophy encourages a stay-
at-home approach for the

45. dying, there are often needs for short-term interim institutional
care to manage complicated
medication regimens. The nursing center, recognizing an
opportunity in this area, could offer
such institutional services at lower costs than the traditional
inpatient, acute-care hospital.
The patients benefit from the lower charges and the nursing
center, from increased usage.
Alternatively, the nursing center may decide it does not have
the staffing expertise or phar-
maceutical services to extend the service, even though the
opportunity exists. In either case,
opportunities cannot be pursued if they are not recognized and
analyzed.
The same is true for threats. An HCO already in trouble from
inadequate funding and in
heavy debt would face even greater risks if it lost a key leader
to illness or death without any
Section 4.5Conducting an Internal Analysis
preparation for a replacement. The ripple effect of bad publicity
regarding the management
and expenses of other HCOs may also be a threat to the
existence or at least the effectiveness
of an HCO. Upon recognizing such threats, and analyzing the
possible ramifications of events,
an HCO can avoid many crises by developing the contingency
plans for dealing effectively
with such situations. Some have referred to this process as the
what if and what then analysis.
In other words, asking the questions What if this happens? and
What do we do if this happens?

46. helps an HCO deal better with major events that might be
detrimental to the organization.
The more you know about the people being served, the better
you can meet their needs. Thus,
the HCO’s patient/client base should be a prime element for
study. Here, building a database
is useful. Many successful businesses, such as Wal-Mart, are
continually doing research to
learn more about their customers. An HCO should do the same
thing. Information can be
gathered on such factors as marital status, family size, age of
family members, occupations,
housing, means of transportation, healthcare needs, reasons for
using the HCO’s services, and
length of time using the HCO’s services. All of these are good
subjects to gather information
about by asking questions.
Scanning the environment of an HCO’s operation for significant
trends, especially in chang-
ing times, is an ongoing effort. This stage in the planning
process is not about gathering data,
reporting that data, and then forgetting about the data. The
environment must be constantly
monitored to help ensure that the HCO survives and grows.
4.5 Conducting an Internal Analysis
After identifying an HCO’s vision and mission and having
considered the environment in
which the HCO operates, strategy planners must objectively
assess the strengths and weak-
nesses of the organization’s internal operations. HCO
administrators can learn from athletic
coaches in this area. Coaches constantly assess the strengths
and weaknesses of their own

47. team as well as the opponent. The coaches try to maximize their
teams’ strengths on game
day, and, during practice, remedy their teams’ weaknesses.
Organizations have certain strengths that make them uniquely
suited to carry out their tasks.
Conversely, they have certain weaknesses that inhibit their
abilities to fulfill their purposes.
HCOs that seek …