Organizational Flexibility as a Strategic Option ...

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Organizational Flexibility as a Strategic Option: Fostering Dynamic Capabilities of Hospitals Casimiro Dias and Ana Escoval

Abstract The main purpose of this article is to examine how the internal and external dimensions of organizational flexibility impact hospital performance. Results reveal that matching internal and external flexibilities contributes to the development of capabilities to adopt new strategic options. Such interactions have a significant impact in terms of hospital performance. A cluster of dynamic hospitals, which is characterised by high levels of both internal and external flexibilities, (instead of that have high levels of both internal and external flexibilities) was found to have the double level of performance compared with other clusters. The implications for research and managerial practice are discussed.

H

ospitals in Europe are currently facing an increasingly unpredictable, complex and chaotic external environment. Such dynamic circumstances have been even described as hyper-turbulent because external changes are occurring at a faster pace than the rate at which hospitals can react (Rotarius and Liberman 2000). This turbulence is mainly explained by three major trends: the pressure on hospitals to ensure cost-effective measures and managed care; social dimensions as the health sector role expands into wellness and self-care; and technological developments marked by shorter life cycles (James et al. 2004). A key challenge for hospitals remains to incorporate a high degree of flexibility in order to adapt to these changing needs and expectations. Hospitals need to deliver high-quality healthcare, while ensuring access and close co-operation with primary healthcare and other services. Meanwhile, the current 38

Healthcare Quarterly Vol.17 No.2 2014

economic crisis, marked by financial pressures and unemployment, is exposing many people to both physical and mental health problems. In fact, this crisis might be considered a health system shock; such a shock reflects an unexpected event with a significant negative impact on the availability of resources, as well as a positive impact in the demand for health services (Stuckler et al. 2011). The annual growth in health spending of nearly 5% in real terms over the period 2000–2009 slowed or fell in real terms in 2010 in the majority of countries in the Organisation for Economic Co-operation and Development (OECD), reversing a long-term trend of rapid increases (OECD 2012). These challenges add pressure on the hospital sector and its ability to perform well. The traditional approaches to strategic management assume a relatively stable external environment. Their aim is mainly to ensure competitive advantage through the utilization of specific assets, focusing on a particular market niche or a dominant scale. However, the current turbulence calls for new thinking around effective ways to respond to unexpected events. Within this perspective, the awareness of organizational flexibility has increased in the past few years. The point of departure is the idea that sustaining competitiveness in turbulent contexts will require enhancing the organizational flexibility of hospitals (Dias and Escoval 2013; Greenhalgh et al. 2004). Organizational flexibility allows a hospital to explore new opportunities in order to adapt to or prepare for new events; but these efforts succeed commercially only to the extent that the hospital is able to exploit these new opportunities. Therefore,

Casimiro Dias and Ana Escoval Organizational Flexibility as a Strategic Option: Fostering Dynamic Capabilities of Hospitals

flexibility rests on some sort of balance between the exploration and application of assets (Teece at al. 1997). While exploration often requires that existing avenues for action are put aside from the organizational repertoire, application rests on the organizational ability to ensure a certain level of behavioural regularity (Teece et al. 1997; Volberda et al. 2010). The intricacy of such balance is translated in the so-called paradox of flexibility (Volberda 1998). The main idea is that flexibility rests on the creation of dynamic capabilities that facilitate both reactive and proactive responses. The dynamic capabilities reflect a firm’s ability to integrate, build and reconfigure internal and external competencies to address rapidly changing environments (Dias and Escoval 2012; Hamel and Prahalad 1994; Penrose 1959; Teece et al. 1997). Building on previous research in the hospital sector, this article analyzes the relationships between strategy, flexibility and innovation. Indeed, organizational flexibility levels are mainly based on current organizational strategy and external turbulence. On one side, organizational flexibility may impact on the redefinition of current strategies. On the other hand, as the nature of external turbulence might also change, there is the potential for strategic surprises. Therefore, the planning concept of strategy needs to be re-examined (Mintzberg 1994, 1997). The purpose of this article is to explore the influence of organizational flexibility on the performance of hospitals. Our research study reveals how the interaction of both internal and external dimensions of organizational flexibility explain hospital performance. It further looks to the capacity of hospitals to reconcile change and stability by searching for new strategic options. The main argument is that since external changes are becoming increasingly undefined, it might be too risky to rely solely upon a traditional strategic management approach. Therefore, organizational flexibility becomes a strategic option. Such analysis is mainly based on the impact of the interaction between internal and external flexibilities on hospital innovation development and performance.

Results

We gathered primary data on organizational flexibility, innovation and performance from 95 hospitals in Portugal; data were collected through a survey, interviews with hospitals’ boards and a nominal group technique with a panel of experts on health systems. The technical details of the conceptual approach and methodology to address these research questions are presented in the appendix (see Appendix 1 at www.longwoods.com/ content/23832). The results from measuring organizational flexibility along both internal and external dimensions revealed a normal distribution. As the organizational flexibility increased, both at internal and external levels, the performance of hospitals also increased. Furthermore, along the flexibility index, there is a heightened use of new technologies as well as innovation capacity. However, while the use of new technologies increases linearly, the innovation capacity shows an exponential pattern. Further analysis of the combination of organizational changes with their adaptation level to external environment allows in-depth analysis of the correlation between internal and external flexibilities. Such analysis is essential for a better understanding of the correlation’s impact on innovation and performance. Based on a bi-dimensional model of flexibility, hospitals were classified in four clusters: static hospitals, internally flexible hospitals, externally flexible hospitals and dynamic hospitals. The dynamic hospitals are characterized by high levels of both internal and external dimensions of flexibility. Hospital clustering was established by setting a cut point of 5 on an index of internal flexibility ranging from 0 to 10. The less flexible organizations had values between 0 and 5, while the more flexible organizations had values from 6 to 10. For external flexibility, the cut point was 2 on an index ranging from 0 to 4. Figure 1 shows the distribution of hospitals by internal and external flexibilities. Once the chosen criteria for the classification of organizations were applied, 23% of hospitals were ended up in the dynamic

TABLE 1. Distribution of hospitals by clusters of internal and external flexibility Static (n = 14)

Internally Flexible (n = 11)

Externally Flexible (n = 32)

Dynamic (n = 17)

Mean

SD

Mean

SD

Mean

SD

Mean

SD

Internal flexibility

5.09

0.63

6.69

0.67

5.2847

0.49

6.61

0.41

External flexibility

1.40

0.66

1.85

0.63

3.2438

0.43

3.17

0.48

External co-operation

0.39

0.16

0.46

0.16

0.66

0.19

0.68

0.21

ICT

0.45

0.506

0.58

0.515

1.73

0.93

1.84

0.80

Other technologies

1.28

1.16

1.33

1.073

2.69

0.48

2.65

0.49

Innovation

2.17

2.97

2.42

3.232

6.25

4.45

6.15

3.30

Performance

5.90

2.97

6.67

3.05

8.23

5.51

9.98

5.60

ICT = information and communications technology; SD = standard deviation.

Healthcare Quarterly Vol.17 No.2 2014 39


FIGURE 1. Cluster distribution by internal and external flexibilities 9

8

Internal flexibility

7

6

Clusters of hospitals Flexible externally Dynamic

5

Static Flexible internally

4

3

0

1

2

3

4

External flexibility

group. The static group, with lower degrees of flexibility on both dimensions, included 19% of the hospitals. The hospitals that were found to be only internally or externally flexible amounted to 14.5 and 19.3%, respectively. Table 1 shows that the cluster of static hospitals was mainly composed of small and non-specialized hospitals. Their “rigid” form showed a low flexibility mix with mean internal and external flexibilities of 5.09 (standard deviation [SD] 0.63) and 1.40 (SD 0.66), respectively. These hospitals also remained closed unto themselves, showing the lowest level of external co-operation, at a mean of 0.39 (SD 0.16). Overall, within such a static configuration, these hospitals had the lowest levels of both innovation and performance, with means of 2.17 (SD 2.97) and 5.9 (SD 2.97), respectively. The cluster of internally flexible hospitals was mainly formed by low specialized and small hospitals. This cluster showed a narrow flexibility mix with means for internal and external flexibilities of 6.69 (SD 0.67) and 1.85 (SD 0.63), respectively. However, the variety of routines and the controllability were less limited than in the static cluster as the internal flexibility was significantly higher. External co-operation remained low, however, with a mean of 0.46 (SD 0.16). Innovation and performance were high, with means of 2.42 (SD 3.235) and 6.67 (SD 3.05), respectively. The cluster of externally flexible hospitals was mainly composed of highly specialized and large hospitals.


Results revealed means for internal flexibility of 5.28 (SD 0.5) and for external flexibility of 3.24 (SD 0.43). This reflected an extensive flexibility mix dominated by strategic flexibility. These hospitals were mainly focused on external co-operation, with a mean of 0.66 (SD 0.19). By increasing such structural relations with outsiders, the organizations were able to engage more easily in new developments, showing the highest innovation capacity, with a mean of 6.25 (SD 4.45). This group also revealed a high level of performance, with a mean of 8.23 (SD 5.51). Finally, the cluster of dynamic hospitals was mainly composed of specialized and big hospitals). The dynamic cluster revealed a high flexibility mix, with means of 6.61 (SD 0.41) for internal flexibility and 3.17 (SD 0.48) for external flexibility. Similarly to the previous cluster, the dynamic group showed a high level of external co-operation, with a mean of 0.68 (SD 0.21). These hospitals had a high rate of innovation, with a mean of 6.15 (SD 3.30), as well as the highest level of performance at a mean of 9.98 (SD 5.60). While externally flexible and dynamic hospitals have approximately the same level of innovation, the level of performance in the latter group is significantly higher. The major discriminating factor between the four clusters is the combination of both internal and external dimensions of flexibility. Therefore, dynamic clusters revealing high levels of both internal and


external flexibilities present the highest levels of performance. Through the nominal group technique, the group of experts echoed the findings from the interviews that there is a need to ensure the development of a national innovation strategy for the health sector and to align it with the various innovation strategies of hospitals. The main purposes of such an alignment would be to support strategic innovation projects and foster collaboration across different hospitals and with other sectors, in particular universities and technology industries. Discussion

Innovation is considered a crucial element of public policy and management in a society marked by changing needs and expectations in hospital services. The distribution of innovation capacity reveals significant differences across hospitals, which may suggest various strategic directions set by hospitals toward enhanced innovation capacity and performance. Dynamic between Internal and External Flexibilities

This study used cluster analysis to explore the influence of the interaction between internal and external flexibilities on performance. The fundamental issue is whether organizational forms can be self-sustained by promoting strategic flexibility. In other words, are hospitals able to search for new strategic options and deviate from current organizational patterns? The cluster analysis explored the flexibility option in terms of challenges for hospital management and structures: while management has to activate a sufficient flexibility mix, the hospital structure needs to provide enough potential for flexibility. Analysis was focused on two key dimensions: the extensiveness of the flexibility mix and the controllability of organizational conditions. The different possible combinations formed four levels of flexibility: static, internally flexible, externally flexible and dynamic. While different hospital sizes and specialization levels were represented in each group, some general trends can be highlighted. However, it has to be emphasized that the number of hospitals in each cluster was dependent upon the chosen criteria. While it might be tempting to consider that 25% of total hospitals are flexible in comparison with a certain percentage in another sector, this is not possible since flexibility is not measured in the same way. Also, the terms static and dynamic have to be understood within the limits set by operationalization. The static cluster revealed a low flexibility mix, mainly dominated by routines, with little room for improvisation. Also, a centralized structure with several hierarchical layers together with a narrow-minded culture constrained the potential for flexibility. Such characteristics suit the mechanic organization as described previously by Burns and Stalker (1994). Furthermore, the use of new technologies remained low. This was particularly true for information and communications technology (ICT) as

decision-making and information sharing remained confined to the top management. This type of control relies on highly standardized procedures, which might explain the low innovation and performance levels. Within the cluster of internally flexible hospitals, the variety of routines and the controllability of organizational conditions were less limited than in the static group, revealing a higher internal flexibility. The flexibility mix consisted of detailed planning and control systems. As long as there are no unexpected changes, the controllability of such an organization is high. However, faced by unforeseen changes, there might be a “strategic drift.” This would mean that incremental organizational changes would not be able to keep pace with external changes. The cluster of externally flexible hospitals reflected an extensive flexibility mix. While they made use of new technologies, as reflected by a high level of external flexibility, organizational structures and basic shared values were lacking. Such administrative instability might be reflected in a “strategic neglect.” While there is a wide diversity of options for change in such organizations, the implementation of change is particularly difficult. Finally, the cluster of dynamic hospitals revealed both a large flexibility mix and a high controllability of organizational conditions. The major characteristics of dynamic hospitals were in line with previous empirical evidence on learning or integrative organizations (Kanter 1983; Senge 1990). Adaptations to external changes are met effectively without each hospital losing its own distinctiveness. The balance between change and stability is well managed through strategic flexibility. This is particularly important as hospitals face unexpected changes that require a quick response. Such capacity can result in high levels of performance. Dynamic hospitals have a clear advantage in terms of performance. In fact, while the dynamic cluster showed a lower innovation rate than did the externally flexible cluster, it revealed the highest performance levels. These differences are mainly explained by the interaction between the internal and external dimensions of flexibility. In fact, such dynamic capabilities reveal that a hospital can explore new opportunities to adapt to unexpected changes, but its performance improves only to the extent that it is able to exploit these new opportunities. Major Drivers of Dynamic Capabilities

This study explored the main mechanisms through which dynamic hospitals are able to set new strategic options. Results from both the interviews and the expert panel highlight learning, integration and strategic adaptation as key major drivers of dynamic capabilities. The learning processes are mainly about real-time decision-making at an operational level, not merely



about simplifying speed-up steady-state models as these become irrelevant in real-time environments. Dynamic capabilities involve hospitals exploring and learning new models and incorporating their current knowledge. Learning is an important process that, through experimentation, leads to opportunities for innovation and enhanced performance. Another key aspect of dynamic capabilities of hospitals is their ability to assess the value of existing resources and integrate them to shape new competencies. Integration links different organizational routines and tasks, examining the effect of innovations on performance. In fact, minor innovations can have a major influence on how organizational systems are configured. However, such systemic impacts of innovations

A key aspect of dynamic capabilities of hospitals is their ability to assess the value of existing resources and integrate them to shape new competencies. require an effective integration of different tasks. Finally, strategic adaptation might be also seen as an extension of dynamic capabilities in order to match external changes with the organizational response. Such capabilities include scanning the external environment for new opportunities, assessing the organization’s strategic position and setting strategic moves. The cluster of dynamic hospitals revealed its ability to integrate internal and external flexibilities to adapt to rapidly changing environments. The study results suggest that the processes of integration, learning and strategic adaptation are closely interlinked, enhancing dynamic capabilities of hospitals. While strategic adaptation aims at developing new competencies, coherence is kept by linking these adaptations with the current competency base. Furthermore, coordination building on these processes of learning and strategic adaptation also involves a co-adaptive development of new competencies. Therefore, these three mechanisms – integration, learning and strategic adaptation – can be seen as dimensions of dynamic capabilities. Advancing further research in these specific dimensions will contribute to their understanding and measurement of dynamic capabilities. Conclusions

This study concludes that matching internal and external flexibilities contributes to the development of an organization’s capabilities to implement new strategic options. This setup provides a framework for decision-making based in a balance between internal and external flexibilities. This is particularly relevant as the role of ICT has shifted from bringing together different departments to being a strategic asset for an organization.

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The main conclusion is that dynamic capabilities are valid and useful in a turbulent external context, such as the health sector. Within the new current context marked by the financial crisis, organizational flexibility is seen as a strategic option when anticipation is impossible and strategic surprise is likely. Strategic flexibility is the ability to adapt to environmental changes through rethinking of current strategies, asset deployment and investment strategies in a systematic and continuous way. Consequently, strategic flexibility might be extended along two dimensions: the variation and diversity of strategies, and the degree to which hospitals can rapidly shift from one strategy to another. The efforts on performance improvement should be directed toward iterative planning and practice cycles that build on an understanding that successful action is less about meeting targets and more about shifting a system’s behaviour through generic guidance and steering mechanisms. Our study illustrates three major implications about the way hospitals can innovate toward a new strategic direction. Firstly, hospitals need to enhance integration of different functions and services by strengthening communication across the various hospital departments. Such an interactive approach requires a robust information system. Secondly, hospital structures and processes must be developed to ensure data analysis, information sharing and knowledge creation, reflecting their learning capacity. They will need to be flexible enough to support decision-making in real time. Finally, hospitals must be adaptive in terms of information systems, learning dimensions and decision-making.

Within the new current context marked by the financial crisis, organizational flexibility is seen as a strategic option when anticipation is impossible and strategic surprise is likely. The implications for planning are far reaching. In contrast to top-down efforts of large system transformation, a complex adaptive system approach is mainly focused on unfreezing creativity and the potential for innovation (Plsek and Greenhalgh 2001; Rouse 2008). Change management requires continuous monitoring and adaptation to new contexts (Best et al. 2012; Pasmore 1994). The major policy implication is that innovation policies should provide general schemes that can be refined and implemented in a bottom-up model. Such a combined approach has the potential to allow strategic renewal toward innovation and performance improvement. References

Best, A., T. Greenhalgh, S. Lewis, J. Saul, S. Carroll and J. Bitz. 2012. “Large-System Transformation in Health Care: A Realist Review.” Milbank Quarterly 90(3): 421–56.


Burns, T. and G.M. Stalker. 1994. The Management of Innovation. Oxford, United Kingdom: Oxford University Press. Dias, C. and A. Escoval. 2012. “The Open Nature of Innovation in the Hospital Sector: The Role of External Collaboration Networks.” Health Policy and Technology 1(4): 181–86. Dias, C. and A. Escoval. 2013. “Improvement of Hospital Performance through Innovation: Toward the Value of Hospital Care.” Health Care Manager 32(2): 129–40. Greenhalgh, T., G. Robert, F. McFarlane, P. Bate and O. Kyriakidou. 2004. “Diffusion of Innovations in Service Organizations: Systematic Review and Recommendations.” Milbank Quarterly 82: 581–629. Hamel, G. and C.K. Prahalad. 1994. Competing for the Future. Boston, MA: Harvard Business School Publishing. James, W., K. Kaissi and A. Amer. 2004. “Uncertainty in Health Care Environments: Myth or Reality?” Health Care Management Review 29(1): 31–39. Kanter, R.M. 1983. The Change Masters. New York: Simon & Schuster. Mintzberg, H. 1994. The Rise and Fall and of Strategic Planning. New York: Free Press. Mintzberg, H. 1997. “Toward Healthier Hospitals.” Health Care Management Review 22(4): 9–11. Organisation for Economic Co-operation and Development. 2012. Health at a Glance. Paris, France: OECD Publishing. Pasmore, W. 1994. Creating Strategic Change: Designing the Flexible, High-Performing Organization. New York: Wiley. Penrose, E.T. 1959. The Theory of Growth of the Firm. Oxford, United Kingdom: Blackwell.

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About the Authors

Casimiro Dias, MPH, is a technical officer of health systems and public health at the World Health Organization, in Copenhagen, Denmark. He can be contacted by e-mail at [email protected]. Ana Escoval, PhD, is professor of health policy and administration at University Nova Lisboa, in Lisbon, Portugal. She is also the president of the Association for Hospital Development, Portugal.

Plsek, P.E. and T. Greenhalgh. 2001. “Complexity Science: The Challenge of Complexity in Health Care.” BMJ 323: 625–28.

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