How Can a Health Care Business Achieve Strategic Elasticity in a Crisis Environment?

Jarmila Sebestova* and Thomas M. Cooney** This paper examines the dynamics of a company, where all the planned activities run through this organization, must be coordinated on every level. If the organization is quite small and the owner is not a good manager or coordinator, the level of risk and dynamics will increase. The tendency towards static decision making and exiting from the market, due to a critical environment or situation – is why it is important to study this entrepreneurial behaviour in a practical way. This area is presented as a case study, especially made for the area of health care businesses using different statistical methods, ROC curves. -----------------------------------------------------------------*Department of Management and Business School of Business Administration in Karvina Silesian University Univerzitní nám. 1934/3, 733 40 Karvina, Czech Republic Email: [email protected] Dr. Jarmila Sebestova is Assistant professor at department of Management and Business and her main research area is to examine specialties in SME sector. She was participating in some international projects like IPREG or EWORLD (International Entrepreneurship).Her research work was financially supported by the Internal Grant Project of the Silesian University IGS SU 7/2011. **Faculty of Business, Dublin Institute of Technology, Aungier Street, Dublin 2, Ireland Email: [email protected] Dr. Thomas Cooney is Academic Director of the DIT Institute for Minority Entrepreneurship, lecturer in Entrepreneurship at the Dublin Institute of Technology and Adjunct Professor at the Small Business Institute, Turku School of Economics in Finland. He dedicated his research work to the area of understanding fast-growth Firms founded by entrepreneurial teams and other significant areas for connecting entrepreneurial theory with experience. Key Words: Dynamics, effectiveness, entrepreneurship, health care, strategy -------------------------------------Introduction Over the past decade, the study of business activities has taken many diverse forms. Some researchers see business units as just one element of the market, a unit which is attempting to beat the current situation by utilising its own strategy and possibly some form of

destructive innovation as suggested by Schumpeter (1934). Other people think more about the relationships inside the organization, particularly those of managers and owners who tend to organise works and duties. There is also those who argue that every organization is defined as a system which is effective only when (1) it achieves its goals, and (2) it effectively uses human and other resources with minimum costs (Kast and Rosenzweig, 1985). Meanwhile other research studies (for example Baptista and Thurik, 2007) have focused on measuring the turbulence in an industry based on the birth and exit rates of nascent companies. While these studies have found that survival problems arrive mostly in the period of „2-3 year old‟ company, what is not commonly found is such studies are details about the influence of the strategic skills of the owner and how the business unit deals with its business resources under changing or turbulent environment, although Carrie and Thurik (2006) clearly explained the positive relationship between GDP growth and the dynamics of a company. If an organization is quite small and the owner is not a good manager or coordinator, then the level of risk and exit from the market will be increased. In a crisis environment it is critically important for owner-managers to understand the importance of strategic flexibility and this paper contribute to this understanding by examining how Health Care businesses can achieve strategic elasticity in a crisis environment.

Problem Formulation As a result of the current economic crises across the globe, many businesses are now seeking to redesign their future strategy. The challenges for some businesses can be far greater than others dependent upon the size, nature and industry of the business activity. In the Health Care sector for example, bureaucracy and regulative activities are particular factors which can cause significant delays to any potential strategic changes in business behaviour. Anecdotal evidence would suggest that insufficient commercial business knowledge by the

managers of SME Health Care businesses and a lack of entrepreneurial skills relative to the medical care industry could also be considered barriers to growth or barriers to survival within a crisis environment. Therefore, an analysis of the strategic elasticity of small and medium-sized Health Care businesses could help find an answer to the question of how this specialised business segment, with its multi-faceted sources of finance, might deal with challenges from the external environment and what type of strategies might they use to achieve their goals. Strategic planning in SME Health Care businesses has a relatively unique position in the business literature. These businesses are under political, institutional and professional pressure regarding how to use their resources (Light, 1997, Zon and Kommer, 1999), while simultaneously other agencies such as governmental institutions and insurance companies maintain a strong influence on their strategic behaviour. These health care organizations are often criticized for their lack of attention to the factors and signals from the commercial market because of the institutional protection that they enjoy (Oliver, 1991). According to Miller (1992), there are three main areas where each business deals with uncertainties – external, within the sector, and specific to the organization. Since the Health Care manager is an agent of a Health Care business and not a passive observer (Stacey, Griffin, Shaw, 2000), they are required to develop a strategy that will enable the Health Care business to emerge and self organize from their uncertain state (McDaniel, Driebe, 2001). This approach can be expanded with the resource-based approach of managing a firm (Barney, 1991) by adding components of knowledge to provide strategic flexibility to Health Care businesses in the market. This will allow the businesses to be proactive with regard to market risk and to construct their own model of behaviour under the four pillars of crisis strategic behaviour marketing, financial, personal and plan of supply of services.

In attempting to construct a model of strategic behaviour, a number of challenging questions immediately arise. How can one utilise the fundamental planning pillars within health care businesses when the behaviour itself is not predicable? What interactions support the dynamics and adaptability of the business in a positive way? Can different types of stakeholders (or other factors such as business age or connections) shed light on developing a better understanding of strategy making in health care services?

The proposed model

incorporates dynamic behaviour and how manipulating certain items can alter outcomes in the strategic system in predicable way. As a contribution to the literature, the paper will highlight who has the biggest influence on the flexibility of the business and which items are the most important for strategy making under uncertainty and a turbulent environment.

Specificity of Business Activity Entrepreneurship in Health Care Services can be seen as a very specific area of business activity which introduces a unique set of commercial dimensions (Borkovský and Dyntarová, 2010). There are many distinctive barriers to entry within the medical market itself, in addition to the classical business start-up procedures for providing professional medical services. One such distinction is that they are two types of companies - state-funded medical entities and the individual small and medium-sized enterprises. A fundamental problem of doing business and planning strategy can be seen in the perspective of the medical art and business (Souček and Burian, 2006, Arrow, 1963), where such peculiarities are highlighted: 

Conflict between medical science and available resources: It is not easy to balance the provision of services according to patient needs or expectations based on innovation, science and transfer of research in the area of drugs and procedures, combined with the available financial resources of the health care provider.



Standardization and calculation of services: The service sector by definition deals with problems such as scaling and process measuring. Such irregularity can cause problems with the appropriate calculation of routine activities as more than 60% of activities are based on individual care.



Business knowledge and management: Health Care is classified under the service sector as a knowledge-intensive service that requires lifelong learning in this field. However there is a phenomenon within start-ups that highlights a lack of basic skills regarding business knowledge and management within health facilities.



Strong influence of institutions: The first part of influence or lobbying in this business activity comes from pharmaceutical and biomedical companies, offering instrumentation, drug support or testing and construction companies. A second influence are central institutions who primarily regulate the price policy and Health Care business activities (Ministry of Health), make the expertise reviews and approval of process (National Institute of Drug Control, National Institutes of Health), give licences for health insurance companies, regulate co-operation with the various business entities. The last influencer are the patients as recipients of care, seeking high quality at low cost, but who do not appreciate the real cost of their care.

On the other hand, it could be argued that such business units behave as normal enterprises for the following reasons (Borkovský and Dyntarová, 2010): 

They have fixed prices for their services,



They give wage rates to their employees,



They pay for goods purchased at market price (medicines, equipment).

When the service is done, after a patient has been through a complicated relationship, the services are then mostly paid by someone else (health insurance company), and the provider (medicare businessman) loses the direct link with the user. The user does not know about the

price and does not make some comments regarding the price adequacy. This information is missing. It is available only when a person chooses a service which is not covered by public insurance and a person has to pay directly to the business owner. It is important to note that Health Care Services differ from all others in two basic perspectives, they not only make influence on our life and it quality, but they also: 

Must be offered by a professional, knowledgeable provider to whom the customer trusts that they will select the most suitable type of service.



Customers are in the position of service recipients, who often do not know what they need and business meetings are influenced by the recommendations of the provider. Initially it is a classic business relationship where customers come for the service. But the customer only chooses the consultant services and assumes responsibility for the final decision, while the service will be chosen by the provider.



For the service provider there arises a dilemma, should they follow their own business interests or the interests of the customer since it the answer will have an influence in strategy making.

Table 1 draws attention to the various positions, services and providers offered by health services and highlights the complexity of this particular market. Determining strategies to achieve the goals of a Health Care business within such a market can be extremely difficult without the added complications of a turbulent economic climate that is currently sweeping across many countries. The purpose of this research is to attempt to understand how ownermanagers of Health Care businesses are presently deciding upon their business strategies and in what manner might the decision-making process be improved.

Table 1 - Health Services Position on the Market (Borkovský and Dyntarová, 2010) Market Position Public goods Positive externality

Type of Service Compulsory vaccination Epidemiological treatment

Type of Business Provider Medical unit

Automatic consumption Facultative consumption Mixed Good Good under Curacy Good under Protection Natural monopoly Mixed private Goods Private goods Monopoly and oligopoly

Preventive Care Prenatal care Outpatient / hospital and clinics, social care Antibiotics, drugs Selected vitamins springs, spas, climatic location Extra Care High-level specialized services Plastic Surgery Products of alternative medicine

Pharmacy, Anti-Drug Center Prescription Spa facilities, hospital Dentist, orthopedics Specialized clinics Unit of alternative medicine

According to the review of literature that was carried out in advance of any primary research being undertaken, no identifiable study has yet attempted to measure strategic elasticity across economically active units in this sector of the health industry. Neither has anyone attempted to find the answer regarding which parts of strategic planning could be highlighted as key pillars of success under crisis environment within this sector and could be used as accelerators of change in organizational behaviour in trying to simulate the process. This paper compares the original options of measurement based on factor analysis and reflects upon the possible problems of applying these options to this context. From a practitioner perspective, the paper will give feedback for entrepreneurial effectiveness in this highly specialised area of commercial activity. The purpose of the research is to examine how a Health Care business can achieve strategic elasticity in a crisis environment. It is the ambition of the research that it will be possible to determine whether measuring elasticity (or its simulation of the phenomenon) under an uncertain environment can confirm or refute commonly cited arguments stating that „small and middle firm are flexible on changes‟ (e.g. Galbreath, 2004; Carmeli, 2004; Krupski 2005; Collins and Porras, 2004; Bateman and Crant, 1993; Butler and Ewald, 2000). Accordingly this pilot study only analysed the data necessary to build a model of an „ideal strategy plan‟.

Health Care System in the Czech Republic The Czech Republic has a system of Social Health Insurance (SHI) based on compulsory membership in a health insurance fund. The Ministry of Health's chief responsibilities include setting the health care policy agenda, supervising the health system and preparing health legislation. The Ministry also administers certain health care institutions and bodies, such as the public health network and the State Institute for Drug Control. Patients are free to choose one of health insurance funds to provide (pay) for their care. Insurance contributions are obligatory and the amount depends on the wage or income. The majority of expenditure is through the SHI system which is financed through compulsory, wage-based SHI contributions and through state SHI contributions on behalf of certain groups of economically inactive people. Approximately 95% of primary care services are provided by physicians working in private practice, usually as sole practitioners. Patients register with a primary care physician of their choice, but can switch to a new one every three months without restriction. Primary care physicians do not play a true gatekeeping role as patients are free to obtain care directly from a specialist and do so frequently. Secondary care services in the Czech Republic are offered mainly by private practice specialists, health centres, polyclinics, hospitals and specialized inpatient facilities (Bryndová, Pavloková and Roubal, 2009). Figure 1 - Picture of the System

Source: Bryndová, Pavloková and Roubal, 2009

The health system in the Czech Republic has three main organizational features: 1. SHI with virtually universal membership, funded through compulsory, wage-based SHI contributions; 2. Diversity of provision, with ambulatory care providers (mainly private) and hospitals (mainly public) entering into contractual arrangements with the health insurance funds; 3. Joint negotiations by key actors on coverage and reimbursement issues, supervised by the Government.

Figure 2 - Financing System

Source: Bryndová, Pavloková and Roubal, 2009

Figure 2 identifies the method of payment within the Czech medical system and how complex the process can be for owner-managers of Health Care businesses. This will be dealt with further when analysing the results of the survey.

Research Methodology and Results

The survey was targeted at owners or managers of Health Care businesses in the Czech Republic with less than 50 employees. A total of 384 valid responses were gathered through personal visits and the completion of a standardized questionnaire, collected from November 2009 - June 2010, and again from September - November 2010, so every Health Care entrepreneur had to deal with the changes in the market during the intervening period. The questionnaire had three parts: (1) main reasons for start-up and evaluation of the current environment (access to finance, cooperation, possible, expansion); (2) main barriers to close down the business; and (3) strategy evaluation (resources, responsible person, activities). The target audience primarily consisted of private practitioners and operators of small specialized outpatient clinics such as surgeons, cardiologists, stomatologists, pediatrists, and physiotherapists. The data was analysed using SPSS and the Slávik-Romanová Model (2005) based on mixture of resources and their effective allocation (Barney, 1991), and from all of the primary data gathered an equation for strategic plan dynamics under turbulent environments was developed: SP Health Care: 0.35*M+0.22*V+0.11*F+0.33*P

[1]

Where: SP………… strategic plan dynamics in total (how long it takes the change) M………….. dynamics of marketing plan V………… dynamics of production plan F………… dynamics of financial plan P…………. dynamics personal plan The development of the equation allowed the data to be analysed in many different ways which thereafter enabled deeper insights to be gathered. The accounted weight of each area enables the mean rate of the dynamics of the plan to be measured, as well as the total possible change in planning, and therefore could be used as a descriptor of behaviour.

The analysis is based on data analysis using multidimensional statistical methods in the qualitative research area, using Alpha Factoring under Factor Analysis. All collected data were processed in SPSS for Windows (ver. 18). To get more sophisticated results and to identify dominant tendencies, the applicability of data was examined by Bartlett‟s Test of Sphericity with the values of the presented results being under P<0.05. For all of the data the authors used the Kaiser-Meyer-Olkin Measure of Sampling Adequacy (KMO) with a recommended minimum value of 0.6 (Sharma, 1996). Then the authors used ROC curves for modelling the relationship between the strategy maker and the elasticity of strategy to get equations for each segment and to generate other supporting material. All data inputs had KMO and Bartlett's Test value at a level of 0.736, which make the data analysis valid. Table 2 - Research Sample

Nursing and home care General Practitioners Laboratory Specialists Pharmacy Stomatologists Physiotherapeuts Psychologists Total

Frequency

Valid Percent

10 86 3 67 104 54 44 16 384.0

2.6 22.4 0.8 17.4 27.1 14.1 11.5 4.2 100.0

Size [persons] median 5 3 4 3 7 4 9 2

The research sample was prepared as multidimensional so as to see differences in behaviour. All of the sample are Health Care providers or they are included in the clinical chain in the Health Care sector, but they differ in dependence on demand on service, payment per service (direct or indirect – mostly from insurance) and size. Most of them are officially a micro-sized operation, but they often use the co-operation structure, especially where they share one building and they provide a health centre. Table 3 - Who is Preparing the Strategy?

Owner Delegated Manager Team of specialists Consultant Total

Frequency 262

Percent 68.2

30

7.8

51

13.3

41 384

10.7 100.0

The research found that the dominant role in strategy planning is taken by the owner, who has a dual position as a professional provider of service and a business person. The plans which they prepare are mainly in non-paper form or in simple notes, except for the financial part of the strategy plan, and frequently they do not make the differentiate between a strategic plan and an operational plan.

GP

Laboratory

specialists

pharmacy

Stomatologists

Physiotherapeuths

psychologists

Common model

Personal Finance Production Marketing

homecare

Table 4 - General Evaluation of Plan Elasticity by Scale

3.0 2.5 2.6 3.2

4.03 3.06 2.63 4.03

3.00 1.67 2.00 1.67

3.96 3.00 2.76 1.43

2.53 3.65 2.9 2.91

3.83 2.56 2.28 3.67

4.02 2.6 2.51 3.35

3.06 2.63 2.31 2.25

3.81 2.71 2.61 3.43

scale 1=month, 2=3months,3=6months,4=12moths,5=never, average values

A brief analysis would suggest that the owner/managers are practically oriented, behaviour which each segment prefers in the market. These results provide support that customer relationship management in the Health Care Services is still not widely used, because the most sensitive group are pharmacies, which have to offer more than drugs prescriptions, as they also sell other goods and give advice. In terms of financial planning, laboratories are the most elastic at offering supporting services. They have to create a wide area of work that can be offered to more than one type of medical centre, and they must also be concerned with production planning. Finally, specialists such as surgeons, cardiologists and others care about their marketing activities,

mostly targeted on their reputation in the area of specialization. The effects of the elasticity is greater when:



Businesses are unsupported by the DRG system, are dependent on the direct payment and direct relationships with

customers, and must be more elastic under crisis

environment, 

Businesses offer a wide area of quality-based services to customers where satisfaction is important because of a high level of competition.

It is also possible to make a small comment about each segment. GP units possess a low level of elastic business behaviour as they are typically supported businesses from different funding sources (payments per capita-fixed payments, fixed price medical fee per visit, payments per DRG dependent on production). Home Care Services are mostly paid directly, just as with physiotherapy and psychology and other specialist treatment. However, a high level of competition in these areas gives them the opportunity to behave as a normal business and not be dependent on insurance budgets. But still they are near to being a common-static model. They are in the middle of elasticity. More elastic are dental care providers because they receive direct payments (without support payments per capita) which is only a medical fee per visit. Their work is connected with manual work so it is quite difficult to manage it and they work with rare or new materials, and so they have to manage their time to be more productive. Laboratories and pharmacies are on the top of the elasticity because they are dependent on the work of other segments and so they develop informal-based relationships between units on the market.

In addition to the findings detailed above, a number of different methods have been used to obtain further relevant and useful information for model exploration: a) Cramer´s V Coefficients Modelling

The formula for the variance of Cramer's V is given in Liebetrau (1983). A coefficient is interpreted as the relationship or level of independence of nominal data in cross-tabs. The values of coefficients describe the dependence on each plan segment. According to this criteria strong values between 0.7-0.9 bring opportunity to predict evolution of each elasticity, while values between 0.25-0.5 have significant position in the plan.

Home Care

GP

Specialists

Pharmacy

Stomatologists

Physiotherapist

Psychologists

Table 5 – Cramer´s V Coefficients Significance in the Plan

0.894 0.856 0.721 0.73

0.338 0.221 0.237 0.268

0.251 0.231 0.278 0.236

0.263 0.281 0.157 0.243

0.228 0.437 0.258 0.298

0.261 0.312 0.255 0.284

0.483 0.542 0.428 0.428

Test Result Variable(s) Personal (P) Finance (F) Production (V) Marketing (M) *not used values in grey cells

If one uses only variables with strong values, it could suggest differences that some plans are not important or without elasticity. Table 6 - Equations as a Share on the Total Sensitivity (1) Business Type SP_ homecare (4) SP_GP(2) SP_Specialists (2) SP_Pharmacy (2) SP_Stomatology (3) SP_Physiotherapist (4) SP_Psychology(4)

Equation 0.28*P+0.27* F +0.23*V +0.23 *M 0.56* P+0.44*M 0.47*P+0.53*V 0.48*P+0.52*F 0.26*P+ 0.44* F+0.3*M 0.23*P+0.28* F +0.23*V +0.26*M 0.26*P+0.29*F +0.23*V+0.23*M

SP...strategic plan, grey cells-significant position in the plan

This model supports segmentation according to a first analysis – dependence variable: payments from insurance and portfolio of services. Only three segments behave as classical business units and use all planning tools, and they prepare their plan with equal stress on all activities. b) Factor Analysis, Alpha Factoring

The maximization of factor loading also brings potential changes in sensitivity or elasticity description. The analysis of this data suggest that they did not bring significant changes as the results are similar to scale evaluation.

GP

Specialists

Pharmacy

Stomato -logists

Physioth

erapists

Psycholo gists

KMO Personal Finance Production Marketing

Home Care

Table 7 – Factor loading in the Plan

0.692 0.667 0.901 0.765 0.765

0.744 0.790 0.836 0.605 0.540

0.729 0.762 0.828 0.630 0.699

0.669 0.722 0.651 0.539 0.607

0.651 0.893 0.862 0.591 0.676

0.692 0.772 0.719 0.656 0.573

0.63 0.783 0.694 0.597 0.641

*grey cells signify the highest level of Alpha coefficient

Table 8 - Equations as a share on the total sensitivity (2) Business Type SP_ homecare SP_GP SP_Specialists SP_Pharmacy SP_Stomatology SP_Physiotherapist SP_Psychology

Equation 0.25 * M +0.29* F +0.25*V +0.22*P 0.19 * M +0.3* F +0.22 *V +0.29 *P 0.24* M +0.28 * F +0.22*V +0.26 *P 0.24 * M+0.26 * F +0.21 *V +0.29 *P 0.22 * M +0.29 * F+0.2 *V +0.3 *P 0.21* M +0.26 * F +0.24 *V +0.28 *P 0.24* M +0.26 * F +0.22 *V +0.29 *P

c) ROC (Receiver Operating Characteristic) Curves Hamel (2009) used ROC (Receiver Operating Characteristic) Curves not only in the sphere of medicine and biochemistry, but in business cases too. It is very important to test, classify and identify, which components of strategy are really connected with the external environment and the strategic behaviour of a business unit. The ROC curve is derivate from cross-tabs, so it is connected to the Cramer´s V coefficients evaluation. The ROC Curves were originally used to visually explain optimal operating points for signal discriminators (Egan, 1975). The ranking values are typically normalized to values between 0 and 1 and the left part of the curve represents the behaviour of the model under high decision thresholds (conservative) and the right part of the curve represents the behaviour of the model under lower decision

thresholds. ROC curves were computed for each segment to describe different behaviour (see Appendix 1) to compare two stages of business behaviour – planning stage and implementation stage. After that the area under curve (AUC) explains the significant parts of the plan which cause the success. Figure 3 - ROC Curves

Source: Hamel (2009); Note: A=better performance, suitable to model than B

Table 9: AUC based on strategy preparation

Personal Finance Production Marketing

Owner Manager 0.609 0.384 0.505 0.486 0.507 0.525 0.578 0.426

Team of Specialists Consultants 0.373 0.491 0.496 0.503 0.474 0.497 0.389 0.512

In order to test the behaviour of each segment, the authors used the same method. It was found that the implementation stage was quite different to that expected. All planning resources are prepared as equal partners for success, but after comparison with following table, preferences

were changed (the deviations are in grey scale, only specialist are in the same position without deviations).

Table 10 - Implementation Stage Home Care

GP

Laboratory

Specialists

Pharmacy

Stomatologists

Physiotherapists

Psychologists

Personal

0.329

0.579

0.218

0.546

0.422

0.546

0.534

0.314

Finance

0.455

0.588

0.264

0.564

0.437

0.460

0.464

0.480

Production

0.502

0.493

0.374

0.522

0.565

0.421

0.476

0.450

Marketing

0.472

0.657

0.173

0.570

0.342

0.571

0.483

0.254

Conclusion The research found that all variables must be taken into account to achieve strategic goals. Each dynamics measurement must explain the internal and external validity of their results. In many cases it may bring about more internal validity for the research sample but another phase of experiments is still needed to be able to generalize about this model. The internal validity is significant for the first phase and first conclusions, and provides an opportunity to develop the idea. But on the other hand, this approach brings about problems with the strategic prognosis using only internal valid models in another type of company. Another dilemma could often be called the “socially desired effect”(Green, 1977), where different ideas are not presented because they do not encompass normally used methods or strategy elements. This could cause future problems with strategy development and strategy dynamics. The consequential time delay could cause more behavioural change and may well have an impact on the final effectiveness. This approach divides into the following types of effect: 

Sleeper effect (delay of impact) - if the effect is measured only as the difference before and after the change process and the final effect could be greater because of the reengineering of the main process, new activities and innovations. This approach was used as a model for factors influencing strategic behaviour.



Backsliding effect (decay of impact) - if the dynamics are measured after the project, as an on-going process, so the deviation with the plan and the final effect is near zero.



Trigger effect (borrowing from the future) - businesses are prepared for some problems due to their business area and internal and external procedures, and so they improve their leadership, strategy and goals. It appears to be similar for business plan preparation according to market analysis, price analysis, customer analysis and other factors.



Historical effects (adjusting for secular trends) - for the compilation of strategy dynamic businesses use customer segmentation and price diversification to spread the risk. It is practical to first see the partial effect of dynamic decision making on observed groups and after that it should be used as a strategy as a whole.



Contrast effect (treatment effect) - the plan and the implementation do not join together in the future.

The difference in responding to the business environment and the self interests of companies brings about constraints on being dynamic. Many companies have as the main goal for their future not innovation, but merely survival.

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Appendix 1 ROC - Curves per Strategy Planning

ROC Curves per Specialization