Organizational strategy and the configuration of management control systems in Dutch hospitals

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Organizational strategy and the configuration of management

control systems in Dutch hospitals

by

Mark Elsma - student number 1767119 University of Groningen

Faculty of Economics and Business Nettelbosje 2

9747 AE Groningen 06 14061741 m.p.elsma@student.rug.nl

January 2014

Master of Science, Business Administration

Specialization: Organizational and Management Control (O&MC) Word count: 10536

Supervisor: Dr. B. (Ben) Crom

Abstract:

This thesis is concerned with the Dutch hospital sector. It aims to explore the strategies

of Dutch hospitals and the management control systems chosen with each strategic type. Drawing from contingency research, a framework of hospitals’ strategy is constructed and the notion of a management control system package is applied to the hospital sector. A document analysis of 2012’s annual reports of Dutch hospitals is conducted. It was found that the hospitals’ display fits between strategy and management control system package that are different from the fits found by prior research in other sectors. These differences are reflected upon.

Keywords: Contingency theory, Hospitals, Organizational strategy, Management control systems, The Netherlands

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1. INTRODUCTION

In 2012 BDO, a Dutch accountancy and consultancy firm, conducted an analysis of the Dutch health care sector (BDO, 2012a). The analysis concluded that around 40 percent of Dutch hospitals appeared not to have a clear strategy (BDO, 2012b). BDO argues that having no strategy leads to postponement of choices regarding the hospital’s service portfolio, talent management, innovation, and investment policy (BDO, 2012a). BDO’s figures are notable, because Tucker and Parker (2013) found that in not-for-profit organizations (like Dutch hospitals) “strategy formulation is predominantly intended, deliberate, and purposeful”. This contradiction to BDO’s findings could mean that strategy formulization patterns in the hospital industry deviate from those in the not-for-profit sector as a whole. Tucker and Parker (2013) have considered this possibility by mentioning that for a specific industry the approach to a management control system (MCS) and strategy is influenced by idiosyncrasies of this industry. This leads them to suggest that “future studies confined to individual industry classifications may provide a more comprehensive picture of the MCS-strategy relationship as it applies to this sector” (Tucker, & Parker, 2013). This is what this thesis sets out to do for the hospital sector, which has seen major developments in the use of performance measurement and faces a wide variety of demands from their environment, such as efficiency, safety and speed (Boland, & Fowler, 2000). More specifically, this thesis investigates the strategies of tertiary hospitals. In the hospital sector empirical research into the link between MCS and strategy is scarce (Pizzini, 2006; Hammad, Jusoh, & Yen Nee Oon, 2010). Pizzini (2006), using Porter’s (1980; 1985) typology of business strategy as one of three contingency variables in her quantitative study on cost systems, and Naranjo-Gil and Hartmann (2006) seem to be two of the few studies that have looked into this. Yet no qualitative research has been done to explain the relationship between MCS and strategy in the hospital sector. This thesis attempts to fill this lacuna by approaching the topic in a much more qualitative way – by interpreting annual reports of Dutch hospitals.

Strategies are made at two levels: corporate level strategies for organizations as a whole, and business level strategies for business units within an organization (Anthony, & Govindarajan, 2007: 57). Corporate strategy is about the businesses in which the organizations operates in what way, while business strategy concerns competing in a business. In a hospital, specialties can be viewed as the hospital’s strategic business units (Jack, & Powers, 2004), while the hospital follows a corporate strategy (Clark, & Huckman, 2012). The conclusions drawn by BDO (2012b) are on corporate level and so will the focus of this thesis be.

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and corporate strategy, and has also been applied as such to hospitals (Topping, & Hernandez, 1991). This dual focus, as this thesis will show, makes it suitable for studying hospitals. Moreover, it was created with hospitals as objects of study. The typology also has a fit with management control, or “reducing uncertainty within the organizational system” (Miles, Snow, Meyer, & Coleman, 1978). This fit has also been confirmed by subsequent research (e.g. Collins, Holzmann, & Mendoza, 1997; Guilding, 1999), as will be explained later in this thesis. Because of these reasons the typology will be used as the main typology to model corporate strategy with. MCSs will be analyzed with Malmi and Brown’s (2008) typology of MCS packages. The research question is set as follows:

What (packages of) management control systems accompany which corporate strategies – defender, prospector, or analyzer – in the Dutch tertiary hospital sector? By filling the gap identified, this thesis is theory building by elaborating on existing contingency theory. The twofold research question will be sought to be answered with document analysis, using annual reports and other publicly available documents, and web site information. Table 1 shows the dimensions of strategy. Words in bold represent the direction of this thesis.

Levels  Corporate, business, functional

Outcomes  Intended, emergent, realized, unrealized

Time frame  Past, present, future

Approaches  Strategy formulation, strategic content, strategy implementation Table 1: strategy dimensions. Adapted from Shortell, Morrison, and Robbins (1985).

This thesis aims to provide academics with an understanding of the reasoning behind MCS selection in hospitals. It aims to provide practitioners with an overview of what MCS package goes with what strategy, as found in literature and in the Dutch hospital sector. This can be of value in the case of strategic change from one type to another, in which case the MCS package needs to be redesigned accordingly. This thesis is outlined as follows. First, the theoretical framework is presented. Then the research method is described and assessed. Next, the results of the empirical research is presented, followed by a discussion of these results. Finally, the last section contains implications, conclusions and limitations.

2. THEORETICAL FRAMEWORK

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first it may increase chances of being able to explain what is found and second it decreases the chance of mistakenly interpreting data as not relevant.

2.1 The concept of strategy

Strategies can be intended or emergent, and either realized or not (Mintzberg, 1978). Chaffee (1985) identifies three different views of strategy: the linear view, the adaptive view, and the interpretive view. Organizations can fulfill various goals, such as profitability, maximization of shareholder value, employee satisfaction, and so on. In the linear view, an organization’s strategy then is “the general direction in which an organization plans to move to attain its goals” (Anthony, & Govindarajan, 2007: 56). This linear view argues that “strategy consists of integrated decisions, actions, or plans that will set and achieve viable organizational goals” (Chaffee, 1985). The adaptive view argues that “strategy is the match between an organization’s resources and skills and the environmental opportunities and risks it faces and the purposes it wishes to accomplish” (Hofer, & Schendel, 1978: 11). An example of the adaptive view is the model of Anderson and Paine (1975), who see formulated strategy as a result of the need for internal change and environmental uncertainty both as perceived by an individual that sets out or heavily influences the strategic course of an organization. Finally, the interpretive view sees organizations as collections of social contracts and considers strategy to be “orienting metaphors or frames of reference that allow the organization and its environment to be understood by organizational stakeholders” (Chaffee, 1985). An application of this view to hospitals is provided by Thomas, McDaniel, and Anderson (1991).

2.2 Corporate strategy

Andrews (1971: 28) defines corporate strategy as: “the pattern of major objectives, purposes, or goals and essential policies and plans for achieving those goals, stated in such a way as to define what business[es] the company is in or is to be in and the kind of company it is to be.” Porter (1988) notes that “corporate strategy is what makes the corporate whole add up to more than the sum of its business unit parts”. Further, Merchant and Van der Stede (2012: 688) explain that corporate strategy indicates how resources should be allocated among each business. In a hospital the various specialties can be taken to be its strategic business units (Jack, & Powers, 2004) that work according to a business strategy. Hospitals as a whole need not only determine how to compete, but also where to compete, i.e. which services to provide. Therefore hospitals as a whole follow a corporate strategy (Clark, & Huckman, 2012).

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diversified firm operates in multiple industries that are connected to each other. Its business units benefit from a common set of core competences. An example is Unilever, which operates business units in ice creams, hair products, laundry products, and other branded consumer products. An example of a core competency shared by its business units would be marketing and distribution expertise in this kind of products. A hospital can also be diversified, with the degree of relatedness depending on prior experience beyond inpatient acute care (Snail, & Robinson, 1998; Clement, 1988). A system or network of multiple health care organizations can also be diversified and follow a corporate strategy (Alexander, 1991; Luke, & Begun, 1988; Inamdar, 2007; Bazzoli, Shortell, & Dubbs, Chan, & Kralovec, 1999). The above results in what is displayed in figure 1. The arrows on the left mean that corporate strategy is formulated by hospitals and by multihospital systems they belong to. These two entities need to decide on what to include in their organization, so where to compete. The arrows on the right reflect the fact that both hospitals as a whole and departments within them must decide on how to compete in their environment.

Figure 1: strategy levels in a hospital context.

2.3 Typology of strategy

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with its strategic orientation (Snow, & Hrebiniak, 1980), and has been applied as such in empirical research (e.g. Kober, Ng, & Paul, 2007), which is precisely what this thesis aims to study. The typology concerns choices for organizations as a whole (Hendricks, Hora, Menor, & Wiedman, 2012) about both where to compete and how (Hambrick, 1983). Thus it concerns both business strategy, and has been applied as such to hospitals as a whole (e.g. Beekun, & Ginn, 1993; Ginn, 1995; 1992), and corporate strategy, and has also been applied as such to hospitals (Eastaugh, 1992; Topping, & Hernandez, 1991). This dual focus, as is shown in figure 1, makes it suitable for studying hospitals. Furthermore, this typology used hospitals as an initial setting, making it particularly appropriate for this study. Shortell and Zajac (1990) found strong support for the measurement validity of this typology in the hospital sector. The robustness of the typology has also been demonstrated (Doty, Glick, & Huber, 1993).

They consider three organizational strategies to be viable: the prospector, defender, and analyzer strategies. The three strategic types are described below:

Defender] The defender typically attempt to “seal off a portion of the total market in order to create a stable domain […] by producing only a limited set of products aimed at a narrow segment of the total potential market” (Miles et al., 1978). They strive for optimal performance for these products, mainly through efficiency.

Prospector] Prospectors seek to be among the first to find novel product and market opportunities and make it their prime capability. Product/service innovation is a key aspect in the whole organization and is heavily committed to and invested in.

Analyzer] Analyzers sustain a stable core of products and services while attempting to be leader for some products based on concepts already introduced by prospector-type organizations (Boulianne, 2007). They maximize efficiency, but create considerable room and ability for innovation. However, experimentation is limited in analyzer organizations, so they do not face the same risk associated with major product or service breakthroughs as the prospectors do (Miles et al., 1978). In sum, analyzers try to be more innovative than defenders and more efficient than prospectors. The analyzer type can be seen as what has been termed a mixed or joint strategy (Lillis, & Van Veen-Dirks, 2008; Abernethy, & Guthrie, 1994).

A fourth type, the reactor, is defined as lacking a consistent strategy. According to Miles et al. (1978) the reactor “exhibits a pattern of adjustment to its environment that is both inconsistent and unstable” and this lacking makes it not viable and thus generally not considered a real strategy (Daft, & Weick, 1984).

The next section discusses management control systems and their facets, how they apply to a healthcare context, and what association they have with the strategies identified.

2.4 Control systems

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functions: strategic control and management control. Strategic control assesses whether a strategy is still valid, and if not, how it should be changed (Merchant, & Van der Stede, 2012: 8). A strategic control system is consequently defined as “a system to support managers in assessing the relevance of the organization’s strategy to its progress in the accomplishment of its goals, and when discrepancies exist, to support areas needing attention” (Lorange et al., 1986: 10). Management control, on the other hand is concerned with the implementation and execution of a company’s strategy. It is consequently defined as “the process by which managers influence other members of the organization to implement the organization’s strategies” (Anthony, & Govindarajan, 2007: 6). Management controls are “those systems, rules, practices, values and other activities management put in place in order to direct employee behavior” (Malmi, & Brown, 2008). Malmi and Brown (2008) explain that “if these [controls] are complete systems, as opposed to a simple rule […], then they should be called MCSs”.

Merchant and Van der Stede (2012: 690) explain that “organizational strategies are important to MCS designers because they define what is critical to success” and that “critical success factors should drive the various MCS design choices”. In their typology, Miles and Snow (1978) already connected strategy to controls. Table 2 shows the result of this.

Type Aim Purpose of controls Controls

Prospector Locating and

exploiting new market and product opportunities Facilitation and coordination of numerous and diverse operations  Broad planning

 Low degree of formalization  Benchmarking of R&D

performance

 Decentralized control Defender Stable set of products;

production efficiency

Strict control  Intensive planning  Mechanistic controls  Focus on financial controls  Centralized control

Analyzer Firm base of products;

exploiting new product and market opportunities

Efficiency in stable areas; flexibility in dynamic areas

 Intensive planning for stable areas

 Complex co-ordination mechanisms

 Moderately centralized control R&D means research and development

Table 2: Strategic types and their control. Source: Miles et al., 1978.

Since the book of Miles and Snow (1978), a stream of literature has been dedicated more specifically to investigate this relationship between strategic type choice and certain MCSs. The section below explains MCS as packages, and for each element of the package it includes literature that has researched the relationship between this element and strategy as modeled by Miles and Snow (1978)1. The elements are also placed in a hospital context.

1_{A handful of articles cited in this thesis use the ‘build-hold-harvest’ typology by Gupta and Govindarajan}

(1984), but Langfield-Smith (1997) argues that this typology and that of Miles and Snow (1978) can be

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Literature on MCSs has put forward the notion of multiple MCSs being at work in one organization (Otley, 1980; Flamholtz, Das, & Tsui, 1985). Malmi and Brown (2008) argue that “different systems are often introduced by different interest groups at different times, so the controls in their entirety should not be defined holistically as a single system, but instead as a package of systems”. They designed a conceptual framework of what constitutes such a MCS package. This framework will be used to model MCS packages, first because it includes the MCSs that are actually in the package, second it excludes information systems that support decision making, and finally because it encorporates the widest range of types of MCS compared to other typologies (Malmi, & Brown, 2008). It is presented in figure 2. The package consists of five main elements: planning, cultural controls, cybernetic controls, administrative controls, and reward and compensation. These elements are discussed below.

Figure 2: management control systems package. Source: Malmi and Brown (2008).

2.4.1 Planning

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Flamholtz et al. (1985) define organizational culture as “the set of values, beliefs and social norms which tend to be shared by its members and, in turn, influence their thoughts and actions”. Although culture can be beyond the control of managers, Malmi and Brown (2008) argue that it “is nonetheless a control system when it is used to regulate behaviour”. In a study in Australian organizations Baird, Harrison, and Reeve (2007) found that prospectors’ culture were the ones aimed most toward innovation and outcome orientation, and were followed by analyzers, and finally defenders. Defenders’ cultures were the ones aimed most at stability and respect for people, and were followed by analyzers, and finally prospectors. In a study of Indian organizations Gupta (2011) found that prospectors’ cultures were characterized primarily by externally oriented flexibility and secondarily by internal flexibility through empowerment and participation; defenders’ cultures were characterized by stability and internal control, and externally oriented stability and control, such as defining objectives against competitor; and analyzers’ cultures were characterized primarily by internal flexibility through empowerment and participation and secondarily by externally oriented flexibility. Culture exists not only at the organizational level, but also on group levels in the form of what Dent (1991) terms subcultures (Martin, 2002). These subcultures can be labeled as what Ouchi (1979) calls clans (Malmi, & Brown, 2008). Ouchi (1979) differentiates between clans for organizations within a company, such as departments, and professions for groups that may occupy different departments or companies. Physicians, nurses and managers are examples of such groups in hospitals. Because of the nature of hospitals as a professional bureaucracy on a group level the notion of professional subcultures can be of particular relevance in the hospital context, both those of care providers (Mallidou, Cummings, Estabrooks, & Giovannetti, 2011; Morgan, & Ogbonna, 2008) and of managers (Prenestini, & Lega, 2013). Vast amounts of research into culture in hospitals has been conducted. In a study of 13 hospitals Nystrom (1993) found that consistency in strategy is associated with strong cultures, while weak cultures were associated with strategic inconsistency. An important stream of literature focuses on safety culture, which determines “the commitment to, and the style and proficiency of, an organization’s health and safety management” (Health and Safety Commission Advisory Committee on the Safety of Nuclear Installations, 1993). Research into patient safety culture has been done both on organizational level (e.g. Sammer, Lykens, Singh, Mains, & Lackan, 2010) and on group level (e.g. Steyrer, Schiffinger, Huber, Valentin, & Strunk, 2013). On both levels it is a strong determinant of employees’ behaviour and as such a system to control for patient safety.

2.4.3 Cybernetic controls

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setting (Luckett, & Eggleton, 1991). Figure 2 shows that cybernetic control systems come in four forms: budgets, financial measures, non-financial measures, and hybrids.

Budgets ]2 Budgets are control mechanisms, because they influence the budgetee’s behavior beforehand (Anthony, & Govindarajan, 2007: 381). Past performance is then displayed in budget reports and variance analysis. Studies have found that especially prospectors tend to find budgets in general useful for their operations (Collins et al., 1997; Simons, 1987). Walshe and Smith (2011: 462) describe three techniques of budgeting used in health organizations: zero-based budgeting, incremental budgeting, and activity-based budgeting. With zero-based budgeting, the budget is calculated from scratch for each activity. Incremental budgets are based upon budgets of previous years, while including adjustments for known factors like inflation and growth. Finally, activity-based budgets allow for quick reactions to changing activity levels. Budgeting can be top down, with higher-level management setting budgets for lower levels, and bottom-up, when “the budgetee is both involved in and has influence over the setting of budget amounts” (Anthony, & Govindarajan, 2007: 391). The latter is known as participative budgeting. This participative budgeting is particularly used by prospectors (Kober, Ng, & Paul, 2007).

Financial measures ] Financial measures vary in their short-term and long-term focus. Rajagopalan (1996) found that using long-term market-based financial measures such as market return to shareholders is particularly beneficial for the performance of prospectors, while using long-term accounting measures such as return on equity did not particularly benefit defenders. However, Dutch hospitals do not have shareholders and market-based financial performance measures (Steinbusch, Oostenbrink, Zuurbier, & Schaepkens, 2007). Only accounting measures would then apply, the results of which were inconclusive. Therefore these findings cannot be extended to the Dutch hospital sector. However, Dekker, Groot, and Schoute (2013) found that analyzers put the least emphasis on financial measures, followed by prospectors, while defenders put the greatest emphasis on financial performance. Similar results are found by Naranjo-Gil and Hartmann (2006) in the Spanish hospital sector. A core element of financial results control systems is the use of responsibility centers (Merchant, & Van der Stede, 2012: 262). Responsibility accounting refers to multidivisional firms installing different types of responsibility centers to promote alignment between individual and corporate goals, depending on decision rights delegated to subunit managers (Cools, & Slagmulder, 2009; Vancil, & Buddrus, 1979; Horngren, Datar, & Foster, 2006). An accounting topic pertaining specifically to hospitals and the cost of their medical services is the use of case-mix accounting systems, which arose from the wide variation in inputs and costs from patient to patient (Williams, Finkler, Murphy, & Eisenberg, 1982). Case-mix accounting involves defining a bundle of services that a group of similar patients with similar diagnosis and lengths of stay receives. These groups are called diagnosis-related groups, or DRGs. The Dutch health care sector works with similar items, which are named diagnose behandel combinaties, or DBCs (Oostenbrink, & Rutten, 2006), and more recently DOTs, or

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DBC op weg naar Transparantie. Steinbusch et al. (2007) explain that DBCs “can be described as all the activities and services of the hospital and the medical specialist arising from a demand for care of a patient consulting a specialist at a hospital. They explain that the difference between DRGs and DBCs is that DBCs “are not based on the diagnosis of discharge”, but instead “the codification process starts at the beginning of the care process with the first visit of a patient to a medical specialist” and it stops upon finishing the care process, while “during treatment the use of all hospital services is being registered”. Another difference is that DRGs are only delivered for inpatient care, while DBCs are also delivered for outpatient care. (Steinbusch et al., 2007).

Non-financial measures ] Non-financial measures include product quality, customer satisfaction, speed of delivery, number of ideas generated, employee satisfaction, market share, et cetera (Ittner, & Larcker, 1998; Merchant, & Van der Stede, 2012: 452). They may complement financial measures when using only the latter rewards short-term or incorrect behaviour, or does not capture certain outputs such as ideas (Ittner, & Larcker, 1998). Moreover, compared to financial measures, non-financial measures are particularly important means to enhance performance through increased psychological empowerment and reduced role ambiguity (Marginson, McAulay, Roush, & Van Zijl, 2013). Dekker et al. (2013) found that prospectors and analyzers put equal emphasis on non-financial measures, and more than defenders. Similar results are found by Naranjo-Gil and Hartmann (2006) in the Spanish hospital sector. Govindarajan and Gupta (1985) found that greater reliance on non-financial performance criteria of managers’ bonuses contributes to effectiveness in prospector-like organizations, but hampers it in defender-like organizations. The central performance dimension for hospitals is quality (Anthony, & Govindarajan, 2007: 628), which can be defined as “the degree to which health services for individuals and populations increase the likelihood of desired health outcomes and are consistent with current professional knowledge” (Lohr, 1990). Because effectiveness of care is the main goal for acute care hospitals, non-financial performance measures, in particular patient safety and timeliness, are relatively important. In 2007, 58 percent of Dutch hospitals were in a stage of developing “different kinds of quality management activities and improvement projects” in order “to cross the boundaries of separate disciplines using the quality-improvement cycle”, while 35 percent was in a stage of establishing and integrating quality management into normal business operations (Dückers, Makai, Vos, Groenewegen, & Wagner, 2009). This last percentage is seven years old and is expected to now be higher. Finally, an approach to control of quality is six-sigma, which concerns measuring the percentage of defects (Kumar, & Gupta, 1993). It is a concept adopted in healthcare to reduce variability (Woodard, 2005) and length of stay (Niemeijer et al., 2013) and increase patient safety by minimizing defects (e.g. Chassin, 1998; for a review, see DelliFraine, Langabeer, & Nembhard, 2010, and Glasgow, Scott-Caziewell, & Kaboli, 2010).

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and Funck (2009): the balanced scorecard, benchmarking, and the performance prism. The most widely adopted hybrid MCS is the balanced scorecard (Kaplan, & Norton, 1992; 1996), or BSC, which analyzes an organization from four perspectives. The customer perspective measures what customers think of the organization using metrics such as customer satisfaction. The internal perspective focuses on matters such as core competencies, critical technologies and productivity. The innovation and learning perspective focuses on metrics of development, such as time taken to finish the development of new products. The financial perspective focuses on metrics like return on equity, market share, and cash flow. (Kaplan, & Norton, 1992). The three non-financial aspects can, but not necessarily do (Nørreklit, 2000), enhance future financial performance. The balanced scorecard has been widely adopted in the health care industry (Zelman, Pink, & Matthias, 2003; Bilkhu-Thompson, 2003). With regard to strategy, prospector type organizations have the highest propensity to adopt the BSC, analyzers have a less high propensity to do so, and defenders have the lowest (Hendricks et al., 2012). A second hybrid measurement tool is benchmarking, since it can be done for both financial and non-financial indicators. Benchmarking concerns comparison of own performance and working methods against that of others in the industry (Kros, & Brown, 2013: 342-343). Benchmarking has been applied and researched in the hospital sector (e.g. Nayar, Ozcan, Yu, & Nguyen, 2013; Llewellyn, & Northcott, 2005; see Ettorchi-Tardy, Levif, & Michel, 2012 for a review). Table 3 provides an overview and descriptions of benchmarking activities in health care services as identified by Ellis (2006).

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fundamental to all the prism’s facets, of which it has five: stakeholder satisfaction, strategies, processes, capabilities, and stakeholder contribution (Neely, Adams, & Crowe, 2001). This means that it goes beyond the patient-focused dimension of the balanced scorecard. Another difference with that perspective is that the BSC measures how the patient views the organization in retrospect, while the PP measures what patients’ wants and needs are. The PP is included in this thesis before other performance measurement systems because of its inclusion of strategy (Folan, & Browne, 2005). However, usage of the PP for different strategies has not been researched. A possible reason for this might be that the performance prism is not only a MCS, but also a strategic control system, since Neely et al. (2001) argue that an organization’s strategy should be derived from stakeholders’ needs - an extreme case of the adaptive view of strategy.

2.4.4 Administrative controls

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governance structure influence behavioural possibilities of actors in a hospital. The third type of administrative controls are procedures and policies, which are the results of the design and governance structure. The three administrative controls thus work in conjunction. For instance, in reporting patient safety incidents by nurses, design determines the role of nurses in the hospital, governance structure determines who the nurses are to report to, which is established in the policies and procedures for reporting these incidents.3 Brown and Iverson (2004) found that defenders tend to view procedures and policies (and evaluation systems) as innovations, and that they embed innovations in specific procedures and policies. Finally, one structural development in healthcare is the emergence of patient-focused care, which concerns “a design organized around patients and their diagnoses” through “patient care centers, each focused on a group of aggregated patients with similar diagnoses and care needs” (Hyer, Wemmerlöv, & Morris, 2009). This structure “permits nurses and physicians to more easily apply their expertise and experience, makes it easier to coordinate activities and communicate relevant information, […] deal with problems and conflict situations” (Shortell et al., 1994) and may reduce length of stay and improve financial outcomes for the unit (Hyer et al., 2009). The above cultural controls section revealed that prospectors’ and analyzers’ cultures were characterized by employee involvement and empowerment. Fields, Roman, and Blum (2012) found that patient-focused care is preceded by a culture of involvement and empowerment. Therefore the expectation is that patient-focused care designs are more adopted by prospectors and analyzers, and less by defenders.

2.4.5 Rewards and compensation

Rewards and compensation are regarded as behaviour controlling instruments that are as such important components of MCSs. A stream of literature has investigated the effects of different compensation schemes on the behaviour of employees. In a study of the Canadian non-profit sector, Akingbola (2006) found that compensation was equally important for prospectors, analyzers, defenders, and reactors. Balkin and Gomez-Mejia (1990) found that prospector-like strategies are associated with incentive pay, risk-sharing, pay for performance, and a long-term orientation, as opposed to salary pay, guaranteed pay, seniority, and a short-long-term orientation that are associated with defender-like strategies. Because the incentive pay dimension depends on the innovation aspect of the strategy, analyzers have been found to emphasize incentive pay to an equal degree as prospectors (Dekker et al., 2013). Similarly, Singh and Agarwal (2002) found that CEOs of defender-type organizations on the other hand earned significantly more in general and this difference is because of defenders compensating through (short term) fixed pay such as salaries and benefits, while prospectors emphasized long-term incentives such as stock-based pay. Jiménez-Jiménez and Sanz-Valle (2005) too found that more innovation-oriented strategies are associated with incentive pay. Dutch culture seems to cause a salary pay to be favoured over incentive pay (Jansen, Merchant, & Van der Stede, 2009). However, Dutch physicians’ compensation is in most cases a volume-driven fee-for-service system: many physicians are paid per patient treated (Kirkman-Liff, 1989). In comparison, in the United States non-financial performance measures are often an important basis for bonus compensation for physicians, often in conjunction with financial

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measures (Evans III, Kim, Nagarajan, & Patro, 2010). Other performance measures, such as safety or quality of care are difficult to work with in health care (Pontes, 1995), except in the case of regulatory pressure to do so (Armour et al., 2001; Evans III et al., 2010).

Table 4 presents an overview of the above contingency theory on MCS and strategy. Management control system

package element

Prospector Analyzer Defender Special

remarks

1 Planning ++ + -

2 Cultural controls’ emphasis Flexibility Flexibility Stability, Control 3 Cybernetic controls

Budgets (incl. participative) ++ - -

Financial measures - -- ++

Non-financial measures ++ ++ -

Hybrid measures

Balanced scorecard ++ + -

Benchmarking ++ + -

Performance prism n/a n/a n/a Not

researched 4 Administrative controls Structural design Centralization - +/- ++ Governance structure Number of committees ++ - + Committee characteristics Involves outsiders n/a n/a

Procedures and policies n/a n/a ++ Patient-focused care centers + + - 5 Rewards and compensation Long-term

incentive pay

Long-term incentive pay

Short-term fixed pay

n/a means that there is no theory about this strategy-MCS relationship

Table 4: strategies and their emphasis on MCS elements.

3. RESEARCH METHOD

This section describes the method of research adopted in this thesis. First, the general approach is described. Next, the choice and arguments for a particular sample are given. Then the data collection is mentioned and issues associated with it are reflected upon. Next, the data analysis is mentioned. Finally, operationalizations of concepts are explained.

3.1 Approach

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“find strategic patterns that hold across different venues and with different actors” (Lin, 1998). Second, an interpretive approach contributes to understanding the meaning of concepts in their context. In this thesis’ case this context is the Dutch hospital context. The research for this thesis is mostly done in a positivist way, since it reports on the strategies and MCS combinations observed. However, it also to a lesser extent contributes to understanding these combinations because the explanations for choosing a certain MCS that may be given in the annual reports. This room for explanation this thesis attests to some extent the interpretive approach. Thus, the positivist approach is the dominant one in this thesis, but to a lesser extent an interpretive approach is also taken. Therefore the two approaches are used in conjunction to some extent. Lin (1998) argues that this combination of the two approaches “does more than add substantive content that neither approach could create alone” and that it “also helps correct for biases that each approach suffers from separately”. One such drawback of the positivist approach is that it cannot explain the mechanism implied by a causal relationship, which is a limitation thus to some extent, insofar the explanations are not given in the annual reports.

3.2 Study sample

Dutch hospitals are divided in three categories: university hospitals, basic hospitals, and “top-clinical” major hospitals (Nederlandse Vereniging van Ziekenhuizen, 2012). Top-clinical major hospitals, or tertiary hospitals, have been chosen as the sample to study. These are general hospitals that provide “general diagnostic and medical treatment – both surgical and non-surgical – to inpatients with a wide variety of medical conditions” (OECD, Eurostat, & WHO, 2011: 131). They are providers of highly specialized tertiary care services, often provided after referral from secondary care (Black, & Gruen, 2005: 21-22). Elements that distinguish top-clinical hospitals from other general hospitals is the provision of last-resort advice, the precence of specialist centres of excellence, and a high degree of co-ordination and multidisciplinarity (STZ, 2007). The hospitals in the sample have been selected through their membership with the association for cooperating top-clinical hospitals, the “vereniging van Samenwerkende Topklinische opleindingsZiekenhuizen (STZ)” in Dutch, by using an overview on the web site of STZ (Website 1). This resulted in a selection of 28 hospitals. Tertiary hospitals perform a wide variety of services combined with high required skill level, which grows with the frequency of performing the services – the “practice makes perfect” effect – and leads to greater volume through increasing referral – the selective referral effect – (Gaynor, Seider, & Vogt, 2005; Halm, Lee, & Chassin, 2002). This combination is likely to result in a hospital with more business units, which may entail a rather elaborate corporate strategy.

3.3 Data collection

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be merely crafts of public relations employees, Bowman (1984) states otherwise, arguing that CEOs are seriously involved in the writing process because “CEOs see annual reports as major communication devices to many constituencies, both internal and external, concerning their en their companies performances”. Yet still, needless to say these documents might not give a complete picture of the situation in the sampled hospitals. It is possible that they are formed to serve as a way of answering to different stakeholders’ expectations (Di Maggio, & Powell, 1983) while not consistent with practice, as Lega, Longo, and Rotolo (2013) found in their research into strategic planning documents of Italian public hospitals. In that case annual reports are vehicles of loose coupling (Orton, & Weick, 1990). Although this is beyond the scope of this thesis, it may give rise to validity concerns. A second reason for choosing publicly available documentations is their relatively high accessibility, which is important due to time constraints. These same time constraints have prevented further data collection at a given point. The initial aim was to make sure that no tertiary hospitals remained uninvestigated, since the 28 hospitals in the sample possibly opt for 28 different strategy-MCS combinations. Limiting the data collection to a number of cases makes that some of these combinations may have been missed. A third reason is that their accessibility enhances controllability of the analysis process. However, international generalizability or external validity is hampered by particular characteristics of the Dutch health care sector, such as regulation and ownership. Therefore these characteristics are explained throughout the thesis. 3.4 Data analysis

The document analysis will serve two purposes. First, it is to map out the corporate strategy of Dutch hospitals. Second, the degree to which certain (types of) control systems receive attention is extracted from the hospitals’ documents. Following the example of Bowman (1978; 1984) this will be done through content analysis. The analysis will take into account both the physically present and countable textual elements, or manifest content, and the interpretation of the symbolism underlying the physical data, or latent content (Berg, 2004). The results of the analysis are the researcher’s interpretations of the content of the reports. As Stanton and Stanton (2002) put it, “the visibilities and meanings constructed by corporations in their annual reports are viewed through the lens of researchers of these objects”.

Two analysis techniques will be used: constant comparative analysis (Glaser, & Strauss, 1967) and keywords-in-context, or KWIC (Fielding, & Lee, 1998). The goal of KWIC is “to reveal how words are used in context with other words”: “by finding the keyword throughout the data and looking at the words that surround the keyword”, researchers understand better the meaning of the keyword (Leech, & Onwuegbuzie, 2008).

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The findings will be compared with extant literature, both in the results section and in the appendices under ‘Interpretation’, in order to enhance internal validity (Eisenhardt, 1989). Convergent validity is increased by not only looking at what is mentioned, but also what is not mentioned and what that means.

3.5 Operationalization

This section describes the operationalization of concepts, a necessary step before the analysis: it allows for concepts to be found in the documentations analyzed (Bacharach, 1989). The research is conducted and described in phases. The first phase attempts to distill from the documentation of each hospital its corporate strategy. The second phase seeks to identify the various controls emphasized by the hospitals of the MCS package. An overview of the concepts investigated during these two phases is given in table 5.

Phase Concept Operationalization

1 Defender strategy Main focus on optimizing efficiency; very little to no commitment to product innovation; focus on maintaining current position and current performance

Prospector strategy Considerable investment in and commitment to research and development; presence of innovative services or techniques Analyzer strategy Focus is both on efficiency and on innovation; seeks to detect

other innovations and benefit from them

2 Cybernetic controls Use of balanced scorecard elements; use of performance prism approach; use of budgets; use of benchmarking; use of six sigma

Administrative controls

Importance of procedures, policies, and protocols; board structure and composition; deployment of committees; use of responsibility centers and decentralization

Cultural controls Culture mentioned explicitly; expressed shared norms; patient safety culture mentioned

Planning Themes emphasized: planning, plans, forecasts, projections Reward and

compensation

Any mention of employee payment – bonuses or other incentive payment, and salaries

Table 5: operationalization of concepts.

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At the end of each analysis an interpretation of the findings for that hospital is given. When possible a verdict is given on the strategy and the shape of the control systems package used as distilled from the annual report and possibly from web sites and other documents.

4. RESULTS

The analysis of the annual reports are in appendix A-H. At the end of each appendix is an interpretation describing the case hospital with its findings. Of the eight hospitals analyzed, two are analyzers, three defenders, and three prospectors. Their characteristics are presented in table 6. The theoretical scores from table 4 are presented again for comparison.

Management control system package element

Prospector Analyzer Defender

Findings Theory Findings Theory Findings Theory

1 Planning + ++ +/- + + -

2 Cultural controls’ emphasis

Flexibility Flexibility Stability, control Flexible Stability, Control Stability control 3 Cybernetic controls Budgets + ++ + - ++ - Financial measures + - ++ -- ++ ++ Non-financial measures ++ ++ ++ ++ + - Hybrid measures Balanced scorecard + ++ ++ + +/- - Benchmarking + ++ +/- + ++ - Performance prism

++ n/a + n/a + n/a

4 Administrative controls Structural design Centralization - - +/- +/- - ++ Governance structure Number of committees + ++ + - - + Committee characteristics Diversity Involves outsiders

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Table 6 shows that defenders and prospectors put comparable emphasis on planning, while analyzers were least concerned with planning. Analyzers and defenders mentioned having cultures that create stability and control. Prospectors’ cultures were creating both flexibility, and equally stability/control. Analyzers and prospectors use budgets, but less than defenders do. Financial measures were overall used heavily, and by prospectors and analyzers more than theoretical expectations. Non-financial measures, as expected, were heavily used by prospectors and analyzers, but, unlike predicted, also moderately used by defenders. Analyzers and prospectors mentioned using benchmarking, albeit less than predicted by literature, while defenders reported relatively heavy usage of benchmarking. Overall the hospitals were generally inclined to use the balanced scorecard, as well as performance prism approaches. Analyzers displayed both centralization and decentralization; defenders and prospectors display a decentralized structure of responsibility centers. Prospectors and analyzers use committees to a similar degree, while theory predicted analyzers to have the least committees, and defenders use the least committees, while theory predicted them to use more than analyzers. Committees of all hospitals were specifically reported to have a diverse or heterogeneous composition in order to be more effective in exerting control and making policy, but involving outsiders is not mentioned. Policies and procedures form important MCSs for all the types of hospitals. Patient-focused care structures are not mentioned by defenders and prospectors, while they are by analyzers. Contrary to literature, prospectors use more fixed salaries, while defenders use more incentive pay. Analyzers did not report on their compensation structure. Finally, evidence was found – in p45 of Gelre’s annual report, p8 of Haga’s annual report, and p11 of OLVG’s annual report – that Dutch hospitals do consist of (strategic) business units, as argued earlier in this thesis. Furthermore, various accounts of additional strategic topics have been encountered, concerning multidisciplinary approaches – such as cross-discipline collaboration – to care. These will be discussed in the next section.

5. DISCUSSION

This section discusses the findings presented above. Deviations from expectations and prior findings are discussed. For every deviation the small sample size could be an explanation, particularly for deviations that are not explained otherwise.

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the choice for a stability-providing culture. However, the results are contradictory to the findings and recommendations by Meterko, Mohr, and Young (2004), who argue that hospitals should strive for flexible cultures to enhance patient satisfaction. On the other hand, Wagner, Smits, Sorra, and Huang (2013) found that in terms of patient safety culture, Dutch hospitals’ culture scores relatively low on flexibility in terms of learning and continuous improvement.

The relatively low budget usage by prospectors contradicts earlier findings (Collins et al., 1997; Simons, 1987) and cannot be explained. Research into budget usage by prospector hospitals has not been done yet, so it could be something industry-specific. Financial measures are used by prospectors and analyzers more than theory predicted. This can be explained by the notion of innovative organizations, like prospectors and analyzers, needing to curb their costly innovations (Lillis & Van Veen-Dirks, 2008). Non-financial measures were used as much as expected by prospectors and analyzers. However, they are also heavily used by defenders, while literature (Govindarajan, & Gupta, 1985) found that heavy reliance on non-financial measures hampers effectiveness in defenders. The overall heavy usage can be explained with the importance of non-financial measures – such as quality and safety – for hospitals in general (Mainz, 2003; Yank, 1995) compared to other industries. The balanced scorecard is sometimes specifically mentioned, but often the four aspects are found in one report. Hospitals adopting it is predicted (Zelman et al., 2003), and lowest usage by defenders too (Hendricks et al., 2012). Benchmarking was overall used more than expected. Its use by analyzers and prospectors, and the heavy use of it by defenders could be due to Dutch regulation requiring hospitals to publish indicators (Maarse et al., 2013; Bijlsma, Koning, & Shestalova, 2013). The approach of the performance prism concerns clearly putting the patient first and understanding patients’ needs and wishes, rather than just learning what the patient thinks of the organization. This approach was found in all strategic types. This does not necessarily mean that the hospitals use this MCS consciously. Rather the observation is that this MCS is found to be applicable to hospitals. Overall high usage of hybrid MCS was found. This is consistent with arguments in theory that to hospitals both financial- and non-financial measures are important (e.g. Evans III, 1998; Litvak, & Long, 2000).

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and medical personnel, boards can add members with specific medical, nursing, or management expertise. Heavy emphasis on policies and procedures was found for all strategic types. For defenders this is as expected, for prospectors and analyzers no prior research findings exist to explain this finding. The findings are logical due to the protocols that characterize the medical profession.

Compensations were used different than expected. Defenders displayed greatest incentive use. This could be done because of the “key cognitive processes that lead incentives to affect effort” (Bonner, & Sprinkle, 2002), optimization of which then results in efficiency (Webb, Williamson, & Zhang, 2013). However, prospectors made much less use of monetary incentives. This could be done because monetary incentives may reduce intrinsic motivation and performance for tasks that require creativity (Fessler, 2003), which is important to prospectors since innovation is their core characteristic.

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A recurring underlying theme in the reports is the role of institutional pressures in shaping the hospital as it displays itself in its annual report. Institutions are taken for granted assumptions that can result in pressures include regulation and influence by stakeholders (Burns, & Scapens, 2000). The institutional environment including regulation has not limited hospitals in their range of strategic options, as follows from the types identified in this thesis. This is consistent with findings by Ramaswamy, Thomas, & Litschert (1994) in the airline industry, although this thesis does not include performance. However, the institutional environment has influenced the configuration of MCS packages – for example the heavy use of benchmarking. These findings are supported by Cardinaels and Soderstrom (2013) in their literature review.

6. CONCLUSION

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hold for hospitals everywhere. Future research could be conducted in countries with very different contexts, in order to learn of possible differences and similarities in institutional environments and in resulting MCS-strategy configurations. A third limitation is the small sample size. Finally, the author recognizes that face validity is low since the hospitals are not asked to what extent the findings reflect the actual situation of their hospital.

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