by Jill Myers and Bob Stephen

Note: This is the first in a series of articles addressing strategic risk.

Strategies are hypotheses based upon a number of assumptions.  Every single element of strategy can be influenced—to some extent—by uncertainty.  While the concepts of risk and uncertainty commonly conjure images of what could go wrong, the idea of managing strategic risk includes consideration of seizing opportunities as they arise.  This article introduces strategic risk; for simplicity, we are focusing on threatening risks. 

Risks can be externally based (What happens if disaster strikes the community or a new competitor emerges?) or internal (What happens if a key physician suddenly retires or a critical piece of radiology equipment fails?).  These occurrences are usually unexpected and become a major distraction, preventing the entire organization from achieving the strategies planned.

Organizations faced with these realized risks may have to abandon strategies; ideally, they adapt and change the course of the originally developed strategies.  The worst case scenario occurs when organizations forge ahead with strategies that are no longer appropriate simply because they appear on a strategic plan.

So how do you address these strategic risks and keep your health care organization on track?  The answer is twofold.  First, you must reduce uncertainty by identifying potential strategic risks and increasing organizational knowledge of these risks.  Secondly, you can adapt performance improvement tools that help create strategic alignment. 

Strategic Risks

What are strategic risks, and how do you know where to look for them?  Risk is not a foreign concept in health care organizations.  It is essential that organizations practice sound risk management to monitor and mitigate key threats to the health of customers.  For each key patient risk—falls, medication errors, etc—organizations are looking to better understand what is happening and identify root causes.  Knowledge is critical to reducing these patient-level risks.  Organizations must use a similar approach for strategic risks, but unlike traditional risk management that operates at the patient level, this strategic risk approach focuses on the health of the organization. What risks threaten the achievement of your vision?

These risks take a variety of forms.  Some are externally focused, some internally based, and some a combination of the two.  The chart below provides a listing of common strategic risks.  While some of these are more common than others, all have the ability to derail organizations, rendering strategies moot. 

Common Strategic Risks

External Risks Competition Market changes	Human Resource Risks Knowledge Staffing Employee theft
Financial Risks Cash flow Capital Price pressures	Structural Resource Risks IT systems Proprietary information Regulatory actions
Physical Resource Risks Disasters Bottlenecks	Relationship Risks Reputation Supply chain

Source: Strategic Performance Management, Bernard Marr, Butterworth-Heinemann, 2006

A Real-World Example of Strategic Risk

To get past the theory, it is helpful to consider one real-life example of compounding strategic risks that derailed a successful community hospital.  Note that this hospital suffered for two reasons—it did not identify and monitor risk and it had no systems in place to adapt to uncertainty.

Metro Medical Center (MMC) was the market leader in a small Midwestern community.  It held a sizable advantage in both market share and community perception relative to its competitor, Community Hospital (CH).  Note that while names have been changed for anonymity, this example is real.  MMC was recognized regionally for its ability to provide cutting edge technology, attract leading specialists, and adopt new management techniques.  It had a clear strategy based on these factors and had held a superior market position for years. 

However, this strategy—like all others—was based on assumptions.  In this case, two key assumptions revolved around competition and physicians.  CH tended to compete on customer service and had a competent medical staff that was mostly loyal and did not practice at MMC.  CH did not pursue higher-end specialty services.  The physician assumption at MMC revolved around physician satisfiers; MMC specialists were assumed to value access to cutting-edge technology and the reputation that a practice based at MMC afforded.  These assumptions drove MMC strategies: continue to be a full service provider, continue to invest in technology, and emphasize research and productivity. 

Unfortunately, CH did not operate as MMC assumed it would and set in motion changes that introduced significant strategic risk for MMC.  CH was not content to be an afterthought in market share or profitability.  It realized that to compete, the organization would have to begin offering higher-end specialty services and take share from MMC.

CH decided to upgrade its technology in select areas and approached MMC physicians with a different “value proposition.”  This value proposition was based upon quality of life. CH offered better call arrangements and greater convenience as only a select number of specialties were targeted.  Because of this focus, specialists were able to obtain better OR times, could secure convenient office space, and were generally treated with better customer service. 

The result was that over a matter of months, a number of key physicians left MMC for CH.  Patient volume followed and CH gained financially.  In a short period of time, CH had pulled close to even in market share for key services.

This clearly surprised MMC, which had not considered possible risks and was therefore not evaluating and monitoring these uncertainties.  Even worse was their response after the shift in physician practice.  At a trade group meeting, an MMC executive mentioned to the crowd that his organization had faced a downturn, adding that MMC would address the situation during its next strategic planning cycle (four months away).  Meanwhile, MMC continued to implement its original strategies, despite knowing the assumptions upon which those strategies were built had drastically changed.  MMC never did recover lost share.

Prioritize and Understand

The first step in strategic risk management is to identify risks that will have the biggest impact and are most likely to occur.  Prioritize your strategic risks according to those two criteria and commit to monitoring and further studying those at the top of the list.

This commitment should include assigning responsibility to an appropriate person or team and ensuring that they meet monthly or at least quarterly.  This team should provide regular updates to senior leadership. 

Mitigate and Manage

Each accountable person or team should also be tasked with driving critical activities related to strategic risk mitigation or preparation.  This is where traditional performance improvement tools come into play.

Do not make strategic risk another silo within the organization; rather, integrate these activities with those already taking place around strategy implementation, quality, and performance improvement.

Use these existing change processes to manage and track your strategic risk initiatives.  This may mean assigning higher prioritization to performance improvement or strategy projects that relate directly to an important strategic risk.  Add your risk status to the organization’s Balanced Scorecard.  This last step will help ensure that the organization as a whole is aware of the risks and that senior leadership will address and discuss these items at least monthly. 

Jill Myers is a Wipfli health care manager with more than 15 years of industry experience. Her primary focus is providing solutions for rural health and critical access hospital issues.  Jill can be reached at 952.548.3396 or jlmyers@wipfli.com.

Bob Stephen is a Wipfli health care business professional with more than 16 years of experience in the industry. He applies cutting-edge business tools and analytical techniques to health care organizations across the nation. Bob can be reached at 703.250.2578 or bstephen@wipfli.com.