Organizational Structure in Healthcare Strategic Management

Introduction

Organizational structure refers to the hierarchy within an organization, including the divisional and departmental design, and the chains of command and communication that define how resources are allocated. The structure is the framework for implementing strategy, so it can be very important in the context of strategic management — to the point where the structure sometimes needs to be changed simply to allow a specific strategy to be implemented (Friend, 2014).

This paper examines the role of organizational structure in the strategic management of healthcare organizations. Healthcare is a unique industry in some respects, especially where an organization operates as a not-for-profit entity, in that its strategic objectives are not strictly profit-oriented. It is therefore important to understand not only what organizational structure is, but how it functions in the healthcare context. This paper examines the role that structure plays in implementing strategy and identifies the building blocks of structure, drawing on recent literature on the subject.

Organizational Structure and Implementing Strategy

An organization's structure is what allows it to conduct business. Different structures align resources and reporting responsibilities in different ways. Many healthcare organizations operate a divisional structure, organized either by specialties or by individual facilities. More centralized structures concentrate decision-making power, while decentralized structures allow more decisions to be made at the divisional level. There are pros and cons to differing degrees of autonomy within an organization.

There is no consensus among U.S. healthcare organizations as to the optimal organizational structure. Hyde and Shortell (2012) found that 28% of firms had a centralized power structure, 37% had decentralized structures, and 35% had some combined form. A combined form is one in which some decisions are made at a centralized level while others are decentralized — for example, maintaining a centralized policy and department for malpractice suits or capital expenditures, while otherwise allowing decentralized decision-making on daily operations.

Because organizational structure reflects how decisions are made within an organization, it plays a critical role in both strategy formulation and implementation. The level of centralization in gathering information is not necessarily a major concern, but the level of centralization in decision-making usually is. Strategy formulation can occur at different levels, but to be effective it must be informed by a high level of working knowledge while also legitimately reflecting the overarching needs of the organization. In addition, strategy requires buy-in from the divisions, so there is risk in concentrating decision-making too heavily at the top. Centralized decision-making, however, allows for greater efficiency in allocating organizational resources, as centralized authorities are better positioned than divisional authorities to understand the opportunity costs of the decisions at hand.

With respect to implementation, organizational structure affects the degree of buy-in — a critical component of implementation — as well as the degree to which senior management lends its support. When decisions are made centrally, senior management may be more likely to support those decisions. However, there is also greater risk that communication will be strained by centralized decision-making. The decision-maker must still rely on divisional leaders to guide the implementation process, and this is unlikely to be as effective when those leaders have had minimal input into the strategy (Chaudoir, Dugan, & Barr, 2013). This dynamic may help explain the growing popularity of hybrid decision-making structures.

Research has shown that organizational structure can have a measurable impact on healthcare outcomes. For example, Frankel and Moss (2014) found that organizations with a higher degree of decentralization were able to deliver superior mortality outcomes in emergency settings, a result of workers with immediate situational knowledge being empowered to make the right decisions regarding patient care. Where that level of empowerment does not exist, decision-making is slower, which can have serious operational consequences in time-critical situations.

Building Blocks of Organizational Structure

There are several building blocks of organizational structure. The organizational hierarchy — that is, the reporting relationships — is an essential building block. The organizational chart maps these relationships, and decision-making flows through this chain of command. Who decides what, when, and where are critical factors in determining the quality of decision-making within the organization.

Divisions are another key structural element. Divisions typically define communication patterns and are closely correlated with reporting relationships. In some organizations, the divisional structure is geography-based; in others, it follows functional lines. Individual physical facilities often have their own management structures. A division is more often than not a psychological boundary within an organization, limiting communication between that unit and its peers. Organizations can work to overcome this, but divisions remain a central building block of organizational culture (Lacoma, 2014). In addition to permanent divisions, temporary structures — such as multidisciplinary teams that bridge divisions and may operate outside their constituent units' normal authority — also alter organizational structure in meaningful ways.

Communication architecture is a third building block of organizational structure. Structure determines, to a large extent, how information moves throughout an organization. However, information can travel beyond normal structural boundaries when the architecture allows it. In the information age, knowledge flows fairly freely within organizations, at least in theory. Who communicates with whom is still influenced by structure and reporting relationships, but the ability of information to move around and through normal channels makes communication architecture a powerful element of organizational design (Matthews & Thakkar, 2012).

The building blocks of organizational structure do not, by definition, have inherent advantages or disadvantages — they exist in all organizations and are integral to how those organizations function. What they do have are distinct characteristics. For example, divisions within an organization typically consist of a power structure and a set of dedicated resources, and the degree of autonomy granted to each division will vary across companies.

Conclusion

Organizational structure is a critical element in the strategic management of healthcare organizations. The way that an organization is structured will determine the flows of information within the organization, and the pathway by which decisions are made and strategies implemented. It is therefore important for an organization to be structured in a manner that is closely aligned with its strategic objectives. For example, a healthcare facility that competes as an innovation leader should have a decentralized structure with a freer flow of information throughout. An organization that seeks transactional excellence — such as performing a large number of procedures with a high degree of accuracy and consistency — may prefer a more centralized command structure that allows management to ensure efficient resource allocation, keep costs down, and minimize risk.