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The word count distribution must include at least 350 words in response to each question. 1400 words total and 3 scholarly sources total. I wanted to address the “Real Time” requirement in the Case Summary section so that you don’t lose points unnecessarily. Here is a rule of thumb to work with: If the issue did not occur after January 2018, it should not feature in your case summary. This means your Case Summary essay should be an update of what has occurred over the past 12 months.In addition, don’t quote scholarly journal articles in the Case Summary. Typically, scholarly journal articles will not be “real time.” Moreover, quoting scholarly journals in the Case Summary tends to make students stray into analysis and application, rather than remaining focused on summary. The scholarly journal references should be reserved for your analysis and application essays. References for the Case Summary section should be current online sources. RESEARCH: You need to cite at least three Scholarly Journal articles in addition to citing the course textbook.Library research is required in the COMPLETE assignment of each unit. At least (2) of your citations must be from scholarly journal articles with references and must use citations from the downloaded book, Burns, L. R., Bradley, E. H., & Weiner, B. J. (2011). Shortell and Kaluzny’s Health Care Management: Organizational Design and Behavior (6th ed.). Wikipedia, Wiki Answers, About.com, Ask.com, Yahoo Answers, eHow, Personal blogs, and other sources of that ilk are not credible for academic work. Quoting such sources as credible is strictly forbidden.Finding Articles in EBSCO (Library Help)Here are 2 links that should help you in finding articles in the library:Ebsco-finding articlesEbsco-in a minuteRead the Case Study on (pg.) 342-343 called Strategic Alliances in the Pharmaceutical and Biotechnology Industry. Answer the following questions.1.In a narrative format, discuss the key facts and critical issues presented in the case.2.What do you think are the possible major tensions that exist when a pharmaceutical firm forms an alliance with a biotechnology firm? How would you try to address those tensions?3.Identify different challenges that exist for maintaining or strengthening an ongoing alliance versus beginning a new relationship. Should this alliance occur? Why or why not?4.If you were a CEO of one of the organizations, what steps would you take to foster relationships?
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Chapter 11
Managing Strategic Alliances
Edward J. Zajac, Thomas A. D’Aunno,
and Lawton Robert Burns S
CHAPTER OUTLINE

Alliances in Health Care

Types and Forms of Alliances

What Are Alliances Meant to Do?
A
U
N
D
E
R
S

The Alliance Process: A Multistage AnalysisS

R
Frameworks for Analyzing Alliance Problems
.
LEARNING OBJECTIVES,
After completing this chapter, the reader should be able to:
1.
Better understand why strategic alliances are increasing in use, particularly among health care organizations
2.
Distinguish between different types or forms of strategic alliances, using a number of dimensions

3.
4.
5.
6.
G
A
Classify an alliance both in terms of what it looks like and what it is meant to do
R to alliance structure and outcomes
Understand how alliance motivation is often related
R alliance are compatible with those of your alliance partner
Identify whether your motivations for a strategic
Think about strategic alliances in terms of the Y
likely stages of development that alliances often experience and the
critical issues that you may face at each stage
7.
Distinguish between an alliance problem and an alliance symptom and recognize the different implications for
2
managerial intervention
8.
0
Understand both the pros and cons of alliances
9.
Identify alliances in health care that work and 9
those that do not work
0
T
S
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
322
PART 3 • Macro Perspectives
KEY TERMS
Alliance Objectives
Ownership
Alliance Problems
Partner Orientation
Alliance Process
Pooling Alliances
Alliance Risk
Revenue Enhancement
Alliance Symptoms
Strategic Alliance
Control
Trading Alliances
S
Turbulent Environment
A
Equity-Based Alliances
Uncertainty Reduction
U
Joint Venture
N
D
IN PRACTICE: Hospital Purchasing Alliances: Creating Leverage,
Reducing Costs—and Stirring Up E
Controversy
R
Hospitals set up purchasing alliances (also known as group purchasing organizations, or GPOs) starting in 1910. The GPO
industry developed throughout the latter half ofS
the twentieth century and consolidated in the 1990s into seven large
Cost Reduction
firms, with lots of regional and smaller players. GPOs exist primarily to pool the purchase of medical-surgical supplies,
medical devices, pharmaceuticals, and capital equipment across multiple hospitals to leverage manufacturers, gain lower
prices, and thereby reduce hospital costs (BurnsS
and Lee, 2008). Such purchasing alliances are quite common in other
industries. Research shows that purchasing alliances
R reduce input spending anywhere from 10 to 15 percent of costs,
consistent with common sense about volume purchasing.
.
However, in health care, these alliances have become incredibly controversial. The GPOs, for example, have been the subject
of four U.S. Senate hearings during 2002–2006 (with
, another possibly scheduled for 2011), three Government Accountability
Office (GAO) reports, and a panel workshop convened by the Federal trade Commission in 2002. Why all the attention?
The source of the controversy is a small set of small manufacturers, typically makers of medical devices, who claimed in a
series of reports published in the New York TimesG
that the GPOs have developed contracts with larger manufacturers that
are anti-competitive in nature and therefore exclude
A them from the market. They claim that hospital efforts to contract for
lower prices have the consequence of preventing innovative products from getting to market and thus harming patients.
R
What is remarkable here is that the anticompetitive practices alleged by the small manufacturers are not attributed to the
“usual suspects” in antitrust cases: horizontal combinations
of large manufacturers, or vertically integrated combinations
R
of manufacturers and downstream distribution channels. Instead, the practices inhere in what are ostensibly arms-length
Y
contractual agreements between groups of hospitals, their purchasing alliances, and the manufacturers who sell medical
products. The practices at the center of the controversy do not seem that extraordinary—lower prices for a higher percentage
of purchases (committed contracts), lower prices2
for buying from a single vendor (sole-source contracts) or dual vendors
(dual-source contracts), and lower prices for buying a range of products (bundled contracts). Such practices are found in
other industries (e.g., customer loyalty programs,0McDonald’s Value Meal). But in health care, these practices have been
under intense public scrutiny.
9
There have been repeated calls by small manufacturers and their trade association to undercut the funding mechanism
0
for hospital purchasing alliances, which might cause them to cease operation. Managing strategic alliances has become a
political hot potato. The GPOs, which used to be T
faceless and rather unremarkable, have found they have a whole new set
of constituents that they did not previously serve,S
including the U.S. Senate, the GAO, the FTC, small manufacturers, and
the press. They have also found themselves playing a lot of defense in Congress, the media, and the courts.
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER 11 • Managing Strategic Alliances
CHAPTER PURPOSE
There is no doubt that the U.S. health care environment is
undergoing major changes that could be characterized as
turbulent. As illustrated by the challenges currently facing
hospital purchasing alliances, turbulence characterizes rapidly
changing environments where: (1) organizations are highly
interconnected with one another, and (2) organizations are
highly interdependent with the society in which they find
themselves (Emery and Trist, 1965).
S
This emphasis on connectedness and interdependence
A
is an important basis for viewing a specific organization’s
environment not as some amorphous external force, but U
rather
as the set of other organizations that are interconnected
N or
interdependent with it. This organization, in turn, is part of the
environment for the other organizations. In other words,D
when
an organization looks out with concern or anticipationEat its
turbulent environment, what it sees is other organizations
R
looking out at that organization (Shortell and Zajac, 1990).
S
This conceptualization of organizational environments
suggests the need to focus more attention on how specific
organizations interact with one another. This chapter
S
emphasizes one such type of interaction—cooperative
interorganizational relations. Longest (1990), in discussing
R
what he terms “interorganizational linkages in health care,”
.
distinguishes between market transactions, voluntary
relationships, and involuntary relationships. We ,focus
most of our attention on those interorganizational relations
that are noncoercive and entered into primarily for strategic
G
purposes—that is, that are important to an organization’s
mission and expected to enhance organizational performance.
A
We term such relationships strategic alliances, which are
defined as any formal arrangements between two orR
more
organizations for purposes of ongoing cooperationRand
mutual gain/risk sharing.
Y
ALLIANCES IN
HEALTH CARE
2
Alliances are often viewed as facing high failure rates;0some
claim 50 to 80 percent. For example, early research argued
9 that
strategic alliances, by their very nature, are risky endeavors
0 or
(Harrigan, 1985). The cooperative linkages between two
more organizations are viewed as somewhat fragile, exposing
T
each party to the risk that the other party or parties may
S
not continue to cooperate as expected. The business press
has also had a penchant for describing, in detail, particular
joint ventures or other alliances that failed. The failure of a
cooperative alliance between two organizations often involves
considerable drama, as interorganizational cooperation turns
to conflict and sometimes litigation.
Although it is very important to recognize the pros and
cons of alliances (see Debate Time), we believe that a fixation
on the likely failure and inherent riskiness of alliances may be
misguided. Specifically, we contend that any assessment of the
alliance risk should be balanced with an assessment of the
expected return or benefit of the alliance in terms of improved
financial performance, innovation, and organizational learning,
and the opportunity cost of not engaging in a strategic
alliance. Regarding the first point, while financial performance
is an obvious outcome to consider when analyzing the
success or failure of a strategic alliance, it is not clear that it
should be considered the most important, direct outcome. For
example, innovation may be a driving force behind strategic
alliances, and more generally, alliances may be viewed as a
desirable way for organizations to learn about new markets,
services, and ways of doing business (Zajac, Golden, and
Shortell, 1991). These may actually be negatively correlated
with financial performance, at least in the short run (Shortell
and Zajac, 1988). This issue is discussed in greater detail in
the section on how strategic intentions drive alliance activity.
In terms of opportunity cost, the relevant question is not
whether an alliance is risky, but rather, which is riskier: going
it alone, doing nothing, or engaging in an alliance? Riskiness
is not necessarily a problem. For example, the virtues of
entrepreneurship are often extolled, despite the high risk and
high failure rates involved. Strategic alliances may appear risky
when the baseline comparison is not made explicit, but when
compared with attempting a de novo entry into a new market
or ignoring the market altogether, the alliance may actually
seem like a relatively low-risk proposition (Shortell and Zajac,
1988). In fact, as subsequently discussed, the creation of a
strategic alliance is often motivated by an organization’s desire
to reduce uncertainty.
The issues just raised are particularly relevant for health
care organizations, which have seen an explosion of alliance
building in the last few decades (Bazzoli et al., 2000; Olden,
Roggenkamp, and Luke, 2002). Alliance building is not
limited to hospitals (Alter and Hage, 1993; Zuckerman and
Kaluzny, 1991). There are alliances between hospitals and
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
323
324
PART 3 • Macro Perspectives
DEBATE TIME: Positive and Negative Benefits of Alliances
There are a few facts and many more unknowns about strategic alliances. One fact is that we are witnessing a substantial
increase in strategic alliances in health care. An unknown, however, is whether this fact reflects a positive or negative
development. An interesting example of an ongoing debate is found in Duncan, Ginter, and Swayne (1992). In this section,
we consider some of the arguments swirling around the use of strategic alliances. Kaluzny and Zuckerman (1992) argue on
the positive side for alliances, while Begun (1992) offers counterarguments on the negative side. The following list of issues
summarizes their points of disagreement.
S
A service organizations do business; namely, a change from thinking
1. Alliances reflect a fundamental shift in how health
in terms of control to thinking in terms of commitment,
trust, shared risk, and common purpose.
U
2. Alliances provide organizations with a way toNmanage growing complexity and interdependence while maintaining a
fair amount of individual organizational autonomy.
D
3. Alliances enable organizations to transcend the existing organizational inertia that is often created by complexity and
Equo.
vested interests seeking to maintain the status
R sectors of our society, and failure to apply these concepts to health
4. Alliances have been found to be effective in other
services would be a missed opportunity for meeting the challenges in the future.
S
Negative
1. Alliances distract organizations from their basic
S goal, which is to clobber your competitors or at least behave as if you
have that need. Managers like the thrill of the competitive chase, and competition creates loyalty and team spirit in an
R
organization.
2. Alliances are essentially a fad whose benefits. have been exaggerated, similar to Theory Z, the pursuit of excellence,
product-line management, and total quality management.
,
Positive
3. Alliances can lead to collusion between otherwise competing organizations, can lead to legal problems related to
antitrust challenges, and are attractive only to lazy organizations that are not interested in competition.
Galliances are tremendous and costly, and these arrangements are quite
4. The process hassles of initiating and managing
fragile.
A
5. Governing an alliance means governing by committee,
which we know to be an ineffective way to run a business.
R
In particular, this problem reduces the speed and flexibility of an organization.
R
6. Cooperative strategy makes sense for large, multinational firms seeking to enter new and unknown markets or share
expensive research and development projects,Ybut not for health care organizations that face well-known local markets
and do not need to finance much research and development.
Which of the above perspectives do you favor? How would you justify your position?
2
0
physician groups, between hospitals and health maintenance
organizations (HMOs), and between hospitals, physicians,
9
and agencies of the federal government (Kaluzny, Morrissey,
0
and McKinney, 1990; Bazzoli et al., 1999; Burns and Pauly,
2002). Nor are alliances limited to providers of care.T
Alliances
known as business coalitions have emerged among buyers
S
of care, that is, employers who band together to increase
their effectiveness as purchasers of care for their employees.
The variety of possible alliance partners is quite high, given
the myriad number of players in the different health care
sectors (see Figure 1.1 in Chapter 1) and the number of key
relationships between adjacent organizations (see Table 11.1).
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
CHAPTER 11 • Managing Strategic Alliances
TABLE 11.1 Key Alliance Relationships Between Organizations
in Various Health Care Sectors
Alliance Relationships within and across Sectors
Suppliers and Suppliers
• Pharmaceutical and biotechnology firms (drug development and commercialization)
• Pharmaceutical and medical device firms (development of drug-eluting stents)
• Medical device and information technology firms (remote monitors)
S
• Medical products firms and wholesalers (key distribution partners)
A
Suppliers and Providers
U innovation)
• Medical device firms and physician inventors (device
N advances)
• Medical imaging firms and hospital scientists (imaging
• Group purchasing organizations and hospitals (group
D buying)
Providers and Providers
E
• Hospitals and physicians (PHOs, MSOs, etc.)
R
• Pharmacies and retail clinics (MinuteClinic, TakeCare)
S
• Hospitals and retail clinics (retail medicine feeder for hospitals)
Buyers and Providers
• Employers and retail clinics (on-site primary care S
for employees)
• Managed care/insurers and hospitals/physicians (pay-for-performance
programs)
R
Buyers and Buyers
.
• Employers and managed care/insurers (risk-based,contracts)
• Employers and pharmacy benefit managers (carve out pharmacy benefits)
• Employers and business groups (pooled purchasing of health insurance)
G out pharmacy benefits)
• Managed care and pharmacy benefit managers (carve
A
R to
The causes for this outburst of activity are not difficult
identify. Perhaps the most important and obvious factor R
is that
health care organizations are experiencing what Meyer (1982)
Y
has referred to as a series of “environmental jolts.” These
are relatively abrupt, major, and often qualitative changes
in an environment that threaten organizational survival.
2
Such jolts include increased competition, concern with
0
cost containment, health care reform to reduce the number
of uninsured patients, an aging population, and changes
9 to
the Medicare program (e.g., Prospective Payment System,
Balanced Budget Act, Medicare Modernization Act). 0
T
These jolts create great uncertainty for health care managers.
Alliances may reflect the reality that it is sometimes better
S
to face life’s uncertainties with partners than to go it alone
(Kaluzny, Zuckerman, and Ricketts, 2002; Zuckerman, Kaluzny,
and Ricketts, 1995). Of course, alliances are but one response
to the environmental changes described above. There has also
been a marked increase in other types of multiorganizational
arrangements, particularly multihospital systems and other
forms of horizontal integration (Shortell, 1988; Burns and
Pauly, 2002), vertical integration, consortia, and diversification
(Clement, 1987). In short, as Starr (1982) observed over
25 years ago, the landscape of the health care field is itself
changing: where there were once many small and independent
organizations, there are now clusters of organizations, including
alliances and other types of multiorganizational arrangements.
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
325
326
PART 3 • Macro Perspectives
TYPES AND FORMS
OF ALLIANCES
Alliances vary in regard to ownership, control, size, governance,
and nature of participation.
Ownership and Control
DeVries (1978) and others (e.g., Starkweather, 1971) have
arrayed multi-institutional systems on a continuumSof more
autonomy to more control. However, these rankings often
A
really reflect the degree of ownership, with complete
ownership being equated with the highest form ofUcontrol.
While it seems reasonable to view ownership as related to
N
control, we argue that this can sometimes be misleading.
D
For example, it is well known that McDonald’s Corporation
is very interested in maintaining control over its rawE
materials
to ensure that quality is highly consistent. In dealing with
R

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