The aim of this study was to examine the use of Porter's generic strategies and their effect on performance in the context of the Slovak hospital industry. Using a mail survey the study first identified the natural taxonomy of four strategic types of Slovak hospitals, based on their use of Porter's generic strategies in pure form and in combination. Next, the study examined whether different strategic types were associated with different levels of organizational performance, while controlling for such variables as size and location, which have been argued to influence the hospital performance. The findings indicate that hospitals which follow a "stuck-in-the-middle" strategy, in general, have superior performance on all used performance measures, while hospitals that place only low emphasis on cost leadership, differentiation and focus, labelled "wait and see" in this study, perform the poorest. The study concludes that the research provided body of knowledge relevant for the Slovak hospital industry, that may be used by hospital managers in the strategy formulation process as well as by the researches in exploring the influence of different contingencies on hospitals' strategic orientation.

Copyright MCB UP Limited (MCB) 2001

Svatopluk Hlavacka: Slovak Postgraduate Academy of Medicine, Bratislava, Slovak Republic

Ljuba Bacharova: Slovak Postgraduate Academy of Medicine, Bratislava, Slovak Republic

Viera Rusnakova: Slovak Postgraduate Academy of Medicine, Bratislava, Slovak Republic

Robert Wagner: Slovak Postgraduate Academy of Medicine, Bratislava, Slovak Republic

Introduction

The political environment in the Slovak Republic is characterised by sustained emphasis on equity in access to health care, compulsory health insurance coverage and full coverage of the treatment costs by health insurance companies (HICs). The Slovak Ministry of Health (MOH) regulates the network of organisations providing in-patient care, and by these regulations no new providers are allowed to enter the market. The majority of in-patient care providers are state owned public hospitals, only three hospitals are private for-profit organisations. The MOH directly nominates the directors of the state owned hospitals and currently allocates the prospective budgets to all hospitals. The multiple insurance-based health financing system, which has been in place since 1991, is presently suspended pending a strategic review of health financing.

Health care expenditures continue to consume a growing proportion of the gross national product in the Slovak Republic, being 5.41 per cent in 1990 and already 6.0 per cent in 1998 (U'ZIS, 1996). However, the costs of inputs have also increased continually over the last five years. The budget is allocated by the MOH and is the only form of reimbursement of operating expenses that hospitals have for the purposes of health care delivery. The introduction of the prospective budgets led to an overall decrease in revenue available to hospital by an average of 30 per cent. As a result of these developments the whole industry suffered substantial deficits in operating costs over the past two years.

Within the context of the health care industry, recent changes have seriously affected industry profitability, forcing hospitals to adopt a variety of strategic postures. One would, therefore, expect to find hospitals pursuing Porter's generic strategies (Porter, 1980) in both a mutually exclusive manner, as well as in hybrid forms. Although various studies have examined the application of Porter's generic strategies to the health care industry (Autry and Thomas, 1986; Kumar et al., 1997), no study has examined to what extent the various strategic types are prevalent in the Slovak hospital industry.

The overall objective of the study was to examine the use of Porter's generic strategies and their effect on performance in the context of the Slovak hospital industry. The study first identifies the natural taxonomy of strategic types of hospitals, based on their use of generic strategies in pure form and in combination. Next it examines whether different strategic types were associated with different levels of organisational performance, while controlling for such variables as size and location, which have been argued to influence the hospital performance. Further the study discusses the findings and hypothesizes about their possible explanations. The limitations of the research are addressed. Finally, conclusions are drawn and their implications for managers and researchers are discussed.

Theoretical framework

Strategy means different things to different people (Bracker, 1980). Porter's definition (1985, p. 47)"... positioning a business to maximise the value of the capabilities that distinguish it from its competitors"

draws attention to what has increasingly become the central focus of strategy, to achieve competitive advantage. Strategies that derive their advantage from the achievement of distinctive value in the marketplace are labelled position strategies. According to Porter, distinctive value can be achieved by pursuing the following three "generic strategies": cost leadership, differentiation, and focus. He maintained that his strategies were mutually exclusive or "at least non-complementary" and referred to firms that attempted to pursue more than one generic strategy as "stuck in the middle". A recent body of research contradicts Porter's view and offers that under certain conditions a combination of strategies may be the best way of creating a sustainable competitive advantage (Karnani, 1984; Miller and Friesen, 1986; White 1986; Hill, 1988; Mathur, 1988; Murray, 1988; Miller, 1992; Dess and Miller, 1993; Johnson and Scholes, 1993; Feurer and Chaharbaghi, 1994).

Despite the differences all strategy frameworks have one thing in common which is that they all aim at maximising the performance of an organisation by improving its position in relation to other organisations operating in the same competitive environment (Feurer and Chaharbaghi, 1997).

The positioning school is one of the oldest schools but derives its newness from Porter's enormously influential book, Competitive Strategy (Porter, 1980). Porter drew upon the frameworks of industrial economics, which is perhaps best known through the following simple paradigm (Shortell and Kaluzny, 1994):

-- Market Structure -> Firm Conduct -> Performance

The logic here is that the combined effects of market structure and firm conduct drive the performance. Led by Porter (1980, 1985), the focus shifted from strategic planning to strategic management and a broad range of concepts and frameworks evolved which were aimed at building and sustaining competitive advantage by anticipating and exploiting business opportunities. Porter (1980) has presented three generic strategies for improving the competitive position of an organisation: cost leadership, differentiation, and focus. He argues that an organisation will have to make a choice between these generic strategies if it is to achieve a competitive advantage. By introducing the concept of industry analysis Porter (1985) further provided insight into structures within different competitive environments. This concept assumes five competitive forces, which determine the attractiveness of a given industry. These are:

(1) Barriers of entry into the industry.

(2) Threat of substitute products.

(3) Bargaining power of buyers.

(4) Bargaining power of suppliers.

(5) Rivalry among existing competitors in the industry.

With the increasing speed of change and the level of uncertainty in the competitive environment it appears impossible to determine a strategic direction for an organisation on a systematic basis. Organisations must constantly adapt to fast changing circumstances and, hence, move towards dynamic strategy development (Feurer and Chaharbaghi, 1997). Nevertheless, all the developed concepts and frameworks that have attempted to identify generally valid drivers of performance, although they may seem oversimplified in today's competitive environments, have provided a better understanding of strategy. It was therefore felt that the framework of Porter's generic strategies could still be employed in the Slovak hospital industry for generating knowledge, which may be used in the formulation and implementation of strategies.

Porter's generic strategies

The strategic typology developed by Michael Porter (1980) has dominated the strategic management literature as a means of establishing strategic group membership at the business level. According to Porter (1980), there are two types of competitive advantage: cost leadership and differentiation. Both of these represents what Porter calls "generic strategies". A third generic strategy is a subset of the other two. This strategy is focus.

Cost leadership

When striving to be a cost leader, cost reduction becomes the major theme running throughout strategy. A low-cost strategy addresses facilities, operations, overheads, cost saving from experience, and being relatively frugal in such areas as R&D, service, sales force, training and development and advertising. Overall cost leadership"gives the firm defence against rivalry from competitors because its lower cost means that it can still earn returns after competitors have competed away their profits through rivalry. A low cost position defends the firm against powerful buyers because buyers can exert power only to drive down prices to the level of the next most efficient competitor. Low cost provides defence against powerful suppliers by providing more flexibility to cope with input cost increases. The factors that lead to a low cost position ... also provide substantial entry barriers in terms of scale ... Finally, a low cost position ... places the firm in favourable position vis-a-vis substitutes ... Thus a low cost position protects the firm against all five competitive forces" (Porter, 1980, pp. 35-6)."

Differentiation

Strategies based on differentiation seek to establish fundamental differences in a variety of dimensions so that buyers perceive a marked contrast between the products/services of one firm and its rivals. Firms that successfully differentiate themselves are rewarded for their uniqueness with a premium price. The economics inherent in this generic strategy require that the premium exceeds the extra cost incurred in being unique. Differentiation cannot ignore cost issues, therefore, because premium prices will be nullified by inordinately high costs. Firms that differentiate themselves successfully also create a defensible position against the five competitive forces."Differentiation provides insulation against competitive rivalry because of brand loyalty ... The resulting customer loyalty and need for a competitor to overcome the uniqueness create entry barriers. Differentiation yields high margins with which to deal with supplier power and clearly mitigates buyer power since buyers lack comparable alternatives and are thereby less price sensitive. Finally, the firm that has differentiated itself to achieve customer loyalty should be better positioned vis-a-vis substitutes than its competitors (Porter, 1980, pp. 37-8; 1985, p. 14)."

Focus

The last of the three generic strategies is focus. Firms that adopt a focus strategy target narrow segments of the market, rather than the market segment as a whole. To succeed, they still need to achieve either cost leadership or effective differentiation, but their market is more limited in scale. Through cost focus or differentiation focus, firms seek to exploit differences between what they can do for specific segments versus what their competitors can do. These differences imply that the segments are more poorly served by broad-based competitors than they would be by competitors who serve them alone. By directing firms' capabilities to specific target segments, the focuser seeks competitive advantage even though it does not possess a competitive advantage in the market overall. One prerequisite for a focus strategy is that the target segments are somehow different than other segments in the market (Porter, 1985, pp. 15-16; 1980, pp. 38-40).

Porter (1980, 1985) emphasises that the business should commit to one and only one generic strategy. Failing that the firms are "stuck in the middle". Such firms lack:"... the market share, capital investment, and resolve to play the low cost game, the industrywide differentiation necessary to obviate the need for a low cost position, or the focus to create differentiation or low cost in a more limited sphere (Porter, 1980, p. 41)."

Hospital use of Porter's generic strategies

Porter's model of generic strategies has been found to be particularly useful to the US hospital industry because of the explicitness with which it captures the essence of the strategy formulation process (Autry and Thomas, 1986).

The political, economic and regulatory changes of recent years have stimulated cost containment strategies in the Slovak hospital industry. Hospital managers have focused a great deal of attention on cost control measures in order to protect themselves from competitive forces arising in the industry, but mainly to cope with regulatory changes. Examples of cost control strategies used by hospitals include reducing waste, improving inter-functional co-ordination, income generation by selling or renting the unused capacity, and more recently also reducing staff and eliminating unprofitable services. However, at present there are practically no examples of consolidation strategies in the form of mergers or joint ventures that could lead to economies of scale. By tight cost control hospitals have attempted to demonstrate efficiency in use of allocated resources to the resource providers.

There seem to be also several activities in the Slovak hospital industry that could fall into the category of differentiation strategy. Examples of this generic strategy include creation of "high-tech" image and use of the latest technologies (e.g. computer tomographs and magnetic resonance imaging), differentiation by types of technology used (e.g. laparoscopic surgery), by emphasising the perceived quality of medical staff (e.g. famous university professors leading the care process), provision of "hotel" services, provision of patient support services, provision of services not commonly offered (e.g. burn care, traumatology, transplantology, preventive care). By demonstrating competence and high proficiency, hospitals have attempted to create institutional loyalty and hence price inelasticity.

A focus strategy involves hospitals pursuing a cost leadership or differentiation strategy but competing in a narrow segment - a specific type of medical patient. Examples of focus include obstetrics and gynaecology, geriatrics, paediatrics. Hospitals pursuing this strategy try to offer a unique service for the chosen market segment.

The study of Kumar et al. (1997) has examined the application of Porter's generic strategies (1980) to the US hospital industry and concluded that the five main strategy types (focused cost leadership, cost leadership, stuck in the middle, focused differentiation, and differentiation) were present and consistent with the underpinnings of the Porter typology. However, no study has examined the application of the concept in Slovak health care. Therefore the first question for this study was: To what extent do Slovak hospitals pursue Porter's generic strategies in a pure form or in combination?

Porter's types and organisational performance

Porter (1980) emphasised that the three strategic orientations represent three fundamentally different alternatives to a firm seeking to establish a competitive advantage. Firms that are "stuck in the middle" compete at a disadvantage because the cost leaders, differentiators, and focusers are all able to concentrate their capabilities more effectively. Typically, being "stuck in the middle" means that any advantage a firm might have at one point in time is unlikely to be sustained. In addition these firms suffer from a blurred corporate culture, conflicting business activities and a strained motivation system.

Recent research evidence, however, indicates that:"Porter's generic strategies are not mutually exclusive and that each strategy may be linked to a variety of strategic means (Murray, 1988, p. 390)."

This body of research (Karnani, 1984; Miller and Friesen, 1986; White 1986; Hill, 1988; Mathur, 1988; Murray, 1988; Miller, 1992; Dess and Miller, 1993; Johnson and Scholes, 1993; Feurer and Chaharbaghi, 1994) disputes Porter's contention of mutual exclusivity of his strategic types, and argues that a combination of cost leadership and differentiation may lead to a sustained competitive advantage.

Although Kumar et al. (1997) in their research of the US hospital industry concluded that the structure of the hospital industry favours organisations that follow Porter's (1980) generic strategies, the US hospital industry and Slovak hospital industry could differ. The second research question was therefore: Are there any differences in performance according to the type of strategy adopted by different hospitals?

Methodology

The sample

The data for this study have been collected between December 1999-February 2000. The sample for this study was chosen from the list of acute care hospitals in the 1999 report of the Slovak Institute for Health Care Information and Statistics (UZIS, 1999). An acute care hospital is a hospital in which the average length of stay for all patients is fewer than 30 days and that provides care for short-term patients. The sample consisted of acute care hospitals with 30 or more beds. Hospitals with less than 30 beds were excluded from the study. The hospitals with less that 30 beds have little choice in terms of different strategic options, and this may introduce anomalies in the data (Kumar et al., 1997). Also national institutes providing very specialised care such as oncology, respiratory and cardiovascular diseases were excluded from the study, because it was felt that their focus strategy was predetermined by the purpose for which they were created by the state.

The chief administrators were viewed as the most accurate source for specifying the current business practices and evaluating the organisation's performance (Pearce et al., 1987). A questionnaire was constructed and pre-tested on a group of five chief administrators, revealing that only minor changes in the questionnaire were necessary. The chief administrators of 81 acute hospitals were personally in advance informed about the purpose of the proposed study and its importance to academicians and health care professionals. Two weeks later a questionnaire entitled "Management Practices Survey" together with a personal letter were mailed to the same 81 chief administrators. In the letter, respondents were reminded that the aim of the survey was to investigate current management practices, and the importance of certain performance criteria among hospitals. Respondents were assured of anonymity. A total response of 76 fully completed questionnaires (94 per cent) was obtained. Because of the high response rate, no tests for the non-response bias were considered necessary (Gupta and Govindarajan, 1984).

Measures used in the study

Measures of strategy. This study used a translated and adjusted version of the Kumar et al. (1997) scale that suited the Slovak hospital environment.

Differentiation-based competitive strategy was measured using a three-item, seven-point scale that asked respondents to indicate the extent to which their institution engaged in competitive activities involving:

- introducing new services/procedures;

- differentiating services from competitors;

- utilising market research to identify new services.

For low-cost-based competitive strategy respondents were asked to indicate on a seven-point scale the extent to which their institution engaged in the following six activities:

(1) achieving lower cost of services than competitors;

(2) making services/procedures more cost-efficient;

(3) improving the time and cost required for co-ordination of various services;

(4) improving the utilisation of available staff, equipment, services and facilities;

(5) performing an analysis of costs associated with various services;

(6) improving availability of diagnostic equipment and auxiliary services to control costs.

A hospital use of focus strategy was measured by asking respondents to indicate on a seven-point scale the extent to which they focused on:

- specific group of customers;

- specific services;

- specific market segments.

The scale reliability values (Cronbach alpha) and item-to-total correlations are reported in Table I. Reliability for all three scales exceeded the recommended 0.7 threshold (Nunnally, 1978, p. 245). This corresponds with the findings of Kumar et al. (1997), who refer to the reliability for the scales between 0.85 and 0.86, despite the translation and slight adjustment of the scales in this study. The item-to-total correlation for the items in the scales ranged between 0.75 and 0.85, indicating that they are converging on a common construct. The inter-correlation among the scales was between 0.43 and 0.69, with the maximum correlation between differentiation and focus scales. These correlations are much higher than reported by Kumar et al. (1997) - between 0.27 and 0.32 - and could be attributed to the translation of the scales or to the expected much lower awareness about marketing principles among Slovak health care managers. However, in practice sometimes the focus on specific groups of patients (e.g. elderly) seems to overlap with the differentiation of the services (e.g. geriatrics). Validity of the three scales was assessed by correlating each of the multiple-item scales with one-item measure for each of the three scales (included elsewhere in the questionnaire). Each of the three scales correlated (correlations between 0.7 and 0.81) with the corresponding single item measures.

Measures of performance. This study used the four performance measures specifically relevant to hospitals, as recommended by Kumar et al. (1997). Effectiveness in these four measures is deemed critical for the successful performance of any hospital because continued economic and political support depend largely upon satisfactorily meeting the expectations of stakeholders on these measures:

(1) Ability to retain patients. This measure was used as a function of clinical quality, patient satisfaction, and employee behaviours.

(2) Ability to control operational expenses. This indicates the efficiency of resource use.

(3) Growth in overall revenue. In the Slovak hospital industry such growth is represented, at present, by a hospital's ability to satisfy the key stakeholders, such as the Ministry of Health and health insurance companies, that allocate the prospective budgets. However, it also reflects the ability of a hospital to develop other sources of financing through renting over-capacity in premises, attracting donors, research projects, or patients for direct payments. The last three are a function of quality and staff attitudes.

(4) Return on new services/facilities. The ability to match the needs of the key external stakeholders, such as government, community, patients and purchasers is characterised by this measure. However it is also a measure of efficiency of new service provision.

The organisational performance of the sample was measured using a subjective approach. This approach consisted of asking respondents for their assessment of their organisation's performance on various measures. In contrast an objective approach to measuring business performance uses absolute values of performance measures. Study of Pearce et al. (1987) that has used both the subjective approach and objective measures have found Spearman correlations range from 0.45 to 0.92, all significant at 0.001 level or higher, offering strong support for the validity of the subjective measurement technique as the substitute for "objective" data. The validity of this technique was strongly supported by several other previous studies (Henemann, 1974; Dess and Robinson, 1984).

A translated and adjusted version of an instrument developed by Gupta and Govindarajan (1984), as modified by Kumar et al. (1997), was used. The respondents were first asked to indicate on a seven-point Likert-type scale, where 1 = of little importance, 7 = of extreme importance, the importance their organisation attached to various performance criteria. The respondents were than asked to indicate on a second seven-point Likert-type scale, where 1 = highly dissatisfied and 7 = highly satisfied, the extent to which their organisation was currently satisfied with their performance on each of the same performance criteria. For each performance measure a weighted average was computed by multiplying the "satisfaction" score with the "importance" score.

Results

All the measures in this study were based on self-reported data. The possible common method variance was therefore addressed by use of factor analysis and descriptive statistics. To identify strategic types of hospitals based on their use of generic strategies, hierarchical cluster analysis was used. The performance of hospitals with different forms of strategic orientation was compared using multivariate analysis of covariance (MANCOVA) and univariate analysis of variance. Since hospital size and location was reported to influence their performance (Zelman, 1996) they were used as covariates to remove their influence from analysis.

Common method variance

The use of self-reported data has been noted to create "common method variance" problems, which can either inflate or suppress the magnitude of relationships being investigated (Kumar et al., 1997). The issue of common method variance was statistically addressed by using a factor analysis. A six-factor solution emerged (explaining 68 per cent of the variance) each with an eigenvalue of more than one. No single factor explained more than 32 per cent of the variance. The examination of the basic statistics revealed to the variables used in the study also provides good evidence to the absence of common method variance. The large standard deviations of all variables showed a wide range of response. As noted above, the correlations among the variables that were not theoretically related were low or insignificant. This evidence suggests that the results of this study were not affected by common method variance.

Cluster analysis of strategic orientation

The hierarchical cluster analysis based on the hospitals' use of the three generic strategies uncovered a four-group taxonomy of hospitals. To provide an overview of the similarities and dissimilarities of the four strategic groups, the mean and standard deviations of each generic strategy type within each group are provided in the Table II. There are clear differences in the emphasis placed on the three generic strategies. To facilitate discussion the strategic groups have been labelled I through IV. The strategic thrust of each of the four groups, type of the hospital corresponding with its size and location, and the type of ownership are presented in Table III.

Group I, labelled "focused cost leadership", characterises about 33 per cent of Slovak hospitals. This group places the primary emphasis on cost leadership, however concomitantly pursues a focus strategy.

The largest proportion of Slovak acute hospitals (49 per cent) belongs to Group II characterised by primary emphasis on cost leadership (mean = 6.16) in combination with high emphasis on differentiation (mean = 5.12) and focus strategy (mean = 5.13). These are the "stuck-in-the-middle" organisations (Porter, 1980).

The last two smaller groups place primary emphasis on cost leadership, with low accent on differentiation and focus strategy. However, they differ by the intensity in which cost leadership strategy is stressed. The organisations in Group III are placing only average emphasis on the low-cost position, and seem to adopt a passive stance. Therefore they have been labelled "wait and see".

The "cost leadership" organisations that seem to attempt to compete across the board based on low cost, form Group IV.

There was no group identified that would appear to pursue a primarily differentiation strategy alone, or in combination with a focus strategy, hence no differentiators or focused differentiators were detected among the Slovak acute hospitals.

Controlling for the effects of size and location

Prior research has indicated that the size of the hospital can influence its access to capital and hence increase its ability to purse a differentiation strategy (Zelman, 1996). It was also indicated that the size of the hospital could be a source of economies of scale. The size of the hospital may therefore influence the relationship between the strategic orientation and the performance of the hospital.

The location of a hospital was also noted to potentially influence its performance (Zelman, 1996). Hospitals operating in more rural areas may be in a less competitive environment than hospitals in an urban area. The markets may be in different stages of development in different locations. Levels of competition decrease generally as the environment becomes more rural, and it can be argued that quality expectations differ across this range, with expectations rising as the environment becomes more urban (Swinehart and Zimmerer, 1995).

Hospitals in the Slovak Republic are categorised in three types. Each is characterised by certain bed number, range of services provided, and location. This typology has been used as a proxy for size and location in this study. The main attributes of the hospital types are:

- Type I hospital: A small hospital with 30-300 beds, mostly with four departments: internal medicine, surgery, paediatrics and gynaecology. Generally localised in small towns, hence can be characterised as rural.

- Type II hospital: A medium sized hospital with 400-800 beds. Delivers specialised secondary care. Localised mainly in district capitals, so may be characterised as urban.

- Type III hospital: A large hospital with 900-1,000 beds, providing specialised tertiary and supra-regional care. They are localised in regional capitals, that can be characterised as highly urban.

The type of the hospital was used as covariate in the MANCOVA, when determining performance differences across strategic groups.

Performance differences across strategic groups

Performance was measured in terms of four specific criteria: success to retain patients, growth in revenue, success of new services/facilities, success in controlling operational costs.

A MANCOVA test was used to determine if hospitals categorised as having different types of strategic orientation differed in their performance on these criteria. Because performance may be related to relative size and location and hence type of the hospital, a MANCOVA was used to control for its effect. Results of MANCOVA, presented in Table IV, indicate a significant overall difference (F = 2.93, p < 0.001) in terms of performance across the four strategic types. The univariate analyses indicate a significant difference between all the four performance criteria across the four strategic types.

The focused cost leadership (Group I) show average performance in terms of ability to retain patients, control operating costs, overall growth in revenue, and return on new services/facilities.

Group II that represents the "stuck-in-the-middle" organisations (Porter, 1980), which appear to apply concomitantly all Porter's generic strategies, were found to have superior performance in ability to retain patients, cost control, overall revenue growth as well as average performance in return in new services/facilities.

The cost leadership (Group IV) hospitals seem to have superior performance in return on new services/facilities and high ability to control costs, however achieved only average overall revenue growth and their ability to retain patients seems to be also average.

The "wait and see" cluster (Group III) placing only average emphasis on cost leadership and low emphasis on differentiation and focus strategies showed the poorest performance in terms of all performance measures. Table III summarises the strategic thrust, hospital type profile, and performance of the four strategic groups.

Discussion

The results of this study indicate that Slovak hospital executives currently use a variety of competitive strategies to respond to the changing environment.

Only 5 per cent of the analysed sample of hospitals belong to the cost leadership group, which apparently tries to compete on the across-the-board low-cost strategy. None of the private for-profit hospitals and no large state owned hospitals belong to this group. Although this group showed superior performance in return on new services/facilities and a high performance in terms of cost control, their performance in relation to ability to retain patients was lower than in the "stuck-in-the-middle" group. This seems to reflect that the patients' evaluation of services is based primarily on factors such as access, environment, personal experience rather than costs. If a provider operates on cost criteria alone and does not add value related to the patient experience then the patient may be tempted to another provider who does.

Also the ability to achieve growth in overall revenue is lower than in the "stuck-in-the-middle" group. This may indicate that the key resource providers, the Ministry of Health and the health insurance companies, seem not to value only the low-cost standard product. Cost comparisons in the Slovak hospital system are difficult, because of poor financial accounting mechanisms and lack of standardised cost and performance data (Mintzberg, 1997; Kitchener and Whipp, 1998). Research clearly demonstrates that senior managers, and those who determine prospective budgets are senior managers, tend to rely on informal information (Mintzberg, 1997). Therefore the support of the key stakeholders seems to be more dependent on referred and observed features than demonstrable and measurable low-cost performance.

However, low-cost strategy, which focuses on internal efficiencies, was found to have lower correlation with market orientation, and consequently with the understanding of the customers' needs and wants (Narver and Slater, 1990). Cost-efficiency providers regard cost control and containment as the key to success in the future. Of significance is the lack of importance given to the development of services and forecasting of the future needs of the organisation. While an internal focus can result in considerable advantages, the defensive nature of this type of organisation can result in loss of sight of changing consumer needs and the development and evolution of the role of the hospital (Green et al., 1995), and can eventually result in loss of competitive advantage. Sustainable competitive advantage represents a process that meets the competitive needs of the present without compromising the ability of the organisation to meet future competitive needs (Chaharbaghi and Lynch, 1999).

The focused lost leadership group (Group I) while giving lower emphasis to cost control and having therefore only an average performance on control of operational expenses, has far better performance in terms of ability to keep patients and achieve growth in overall revenue. Concentrating on a certain market niche, these organisations seem to be "the hospitals" for the patients with health problems that fall in any of the designated specialities they deliver. Through their ties with specialty groups, they probably achieve greater geographic reach well beyond the boundaries of the immediate community (Studin, 1995). These ties seem also to help the hospitals to achieve higher overall revenues from the key resource providers than the cost leadership group.

The "wait-and-see" cluster (Group III) accommodates 13 per cent of surveyed hospitals. These organisations have the poorest performance in all performance measures. Although there is evidence of some emphasis given to cost control, this seems to be merely an emergent strategy (Mintzberg, 1994) not an intended one. These hospitals seem to behave passively and rely on the fragmented character (Porter, 1980) of the present Slovak hospital industry, that has a large number of small and medium size providers, and need for local delivery of at least basic services within 20-30 minutes of where people live (Studin, 1995). It is characterised also by high exit barriers that hold back consolidation. When it comes to hospital closures, a broader range of considerations come into play other than issues of efficiency, economics or market power. Hospitals are often centrepieces of communities, a major source of jobs, and political and social status (Zelman, 1996). These factors weight heavily in the choice of a change and modernisation strategy.

Another possible explanation for pursuing such a strategy may simply be a result of the regulatory and managerial approach of the Ministry of Health. The pure regulatory model has been shown to be inescapably burdened by political considerations and special interest groups that can be at odds with principles of managerial efficiency. Government mandates personalise responsibility for unpopular actions in a way that inhibits, if not precludes, hospital administrators from participating in decision making that leads to major staffing layoffs or hospital closures (Weil and Batistella, 1998). The regulatory role of government policy influences the freedom of managerial action and constrains the actions of hospitals which might make perfectly good business sense, but could lose politicians elections (Hacket, 1996).

Whichever explanation may apply, as the hospital industry matures and consolidates, if these hospitals do not formulate and implement a more successful strategy they will probably face the threat of being acquired or forced to exit the market. Eventually either firms themselves make the hard choices, or the choices are made for them (Studin, 1995).

There was no group identified that would appear to primarily pursue a differentiation strategy alone, or in combination with a focus strategy, hence no differentiators or focused differentiators were detected among the Slovak acute hospitals. In contrast, Shortell (1993) found in a study of 500 US hospitals that 25 per cent pursue a strategy of trying to be first in a new product, new service, and new market development, with an additional 13 per cent gravitating towards such a strategy. Kumar et al. (1997) report also in a study of 159 US non-governmental hospitals 16 per cent of organisations being focused differentiators and 8 per cent being differentiators. One possible explanation could be the hypothesis of Trinh (1999) that a lack of financial resources as aconsequence of stringent reimbursement prevents hospitals from differentiation. Also Zelman (1996) and Kumar et al. (1997) stress the fact that differentiation strategy requires considerable initial resources. In the Slovak governmental hospitals the resources for investment are scarce. This could be an explanation why the organisations do not follow differentiation or focused differentiation strategy. Another possible reason why these strategies may seem unattractive may be the reimbursement policies (prospective budget) that at present do not allow for charging premium prices. It has been shown that whether a service is cost reimbursable by insurance does significantly affect the utilisation and competitive advantage of offering the service (Swinehart and Zimmerer, 1995).

The last group (II) that emerged from the cluster analysis is the "stuck-in-the-middle" organisations (Porter, 1980). These organisations are the only ones that stress differentiation, although equal emphasis is placed on cost leadership and focus strategy. Narver and Slater (1990) have found that differentiation approaches, which were interpreted to concentrate on additional "product" benefits, were likely to be pursued by organisations with strong market orientation. They also observed that businesses with the highest degree of market orientation were associated with the highest profitability. Consistent with these observations hospitals in Group II seem to understand clearly the need of the key stakeholders to obtain added value in respect of services provided, and try to satisfy it, in order to achieve sustained competitive advantage. As the study results reflect, they lead performance in such measures as revenue growth and ability to retain patients.

However, as has been discussed above, access to capital seems to be paramount for a differentiation strategy and this is a scarce resource in the state hospitals that, by regulations, cannot accrue it through commercial loan. The MOH distributes capital resources and the system is not transparent, which makes it difficult to consciously pursue a differentiation strategy, which demands investment. Scarcity and lack of transparency in the capital distribution system could explain why these organisations pursue also a cost-based strategy. Following this type of strategy, higher efficiency is achieved, that manifests itself in the superior performance in cost control in our study. It could be hypothesized that the high efficiency is the source of surpluses, that can be used for adding value to the service, hence differentiation.

The apparent success of these hospitals in implementing a combination of cost leadership and differentiation strategy is in agreement with the findings of Miller (1992), who demonstrated that it is possible simultaneously to provide added value in customer terms while keeping prices down. Many Japanese firms have been doing this for years, and arguably it is the strategy pursued by IKEA (Johnson and Scholes, 1993). Here the success of the strategy depends on the ability to both understand and deliver against customer needs, whilst also having the cost base that permits low prices that are difficult to imitate. Such a strategy has been referred to as advantageous (Johnson and Scholes, 1993) as an entry strategy in markets with established competitors, which the Slovak hospital industry apparently is, given the long tradition of health care provision by local hospitals with strong community ties.

Besides simultaneously implementing cost leadership and differentiation strategies, the hospitals in the "stuck in the middle" group (Porter, 1980) put high emphasis on focus strategy. This may be advantageous for entering such established local markets as exist for general services in the Slovak republic. Ohmae (1983) recommends choosing the battlefield carefully, and if at all possible, changing the battlefield. This can be achieved by offering services to an unattended market segment, that may allow the hospital to extend their demographic reach well beyond the boundaries of the immediate community (Studin, 1995). This could further contribute to their success in retaining patients, and could also promote their "brand name", which in turn could enhance the implementation of the differentiation strategy that they pursue.

All the discussed details in Group II seem to be in accord with the findings of Dess and Miller (1993) that if a firm maintains more than one of the competitive strategies simultaneously it will enjoy even greater measures of success.

Another interesting finding from the study is that all the for-profit hospitals in the sample belong to the same cluster namely to the "stuck-in-the-middle" organisations (Group II), which is associated with superior performance. Although their number (4 per cent of the sample) does not allow for statistical significance, it seems that there may be an association between the ownership of the hospital and the performance.

Trinh (1999) reports that conversion of rural hospitals to non-government control allowed rural hospitals to behave more like businesses and achieve better performance. Consistent with these findings, Zelman (1996) reports that for-profit entities may be more willing to consolidate or even close services and facilities, reduce staffing, and take greater advantage of economies of scale. It is asserted that for-profit hospitals may have fewer community ties or obligations and a more aggressive focus on the bottom line, and hence may be less influenced by political or community opposition to hospital down-sizing or closure. Fottler (1981) argues that decisions regarding layoffs or reducing services might be partially mandated by government entities. Josephson (1997) also found that for-profit hospitals had greater efficiencies and more varied access to capital, while they failed to reveal any substantial variance in quality. This evidence could support the findings of our study that seem to indicate that the emerging for-profit sector in the Slovak hospital industry may be a viable alternative to the governmental hospital in the future. However, further research as this sector evolves will be necessary to prove the ownership/ performance association.

As indicated above, the design of this study was based on the study conducted by Kumar et al. (1997) on a sample of US non-government hospitals. The government hospitals were excluded from the study since they do not have much latitude in terms of determining their strategy (Fottler et al., 1989 as cited in Kumar et al., 1997). The fact that in the public hospital sector, the socio-political views of consumers (the public) and customers (general practicioners), and also the regulatory governmental interventions heavily influence the context within which the organisation formulates strategy was also stressed by others (Hacket, 1996; Zelman, 1996; Kitchener and Whipp, 1998). Despite these facts, our study has shown that the governmental hospitals did adopt a range of different strategies to face the current challenges. That seems to indicate, in contrast to openly declared pessimism and resistance to application of strategic tools in the assessment of needs study (Rusnakova, 2000), that choices are available also for the governmental hospitals, and as the found strategy/performance association indicates some of them may be better than others.

The comparison of the results of this research with the findings presented by Kumar et al. (1997) reveals several differences. One of them is the fact that no differentiators or focused differentiators were found among the Slovak hospitals. The second divergence is that the focused cost leaders that were identified to have the best performance in the US non-government hospital industry were not associated with best performance in this research. The third disparity was that the US research did not find any organisations that would match the characteristics of the "wait-and-see" cluster identified by our research. The possible explanations of these differences were already discussed above.

However, the major disparity among both studies appears to be the difference found in the performance of the "stuck-in-the-middle" group. Kumar et al. (1997) found that this group had the poorest performance, and concluded that Porter's view of the non-viability of a stuck-in the-middle strategy appears to be largely true in the hospital industry. In contrast, our findings indicate that this group was associated with superior performance on most measures, and are consistent with the researchers who dispute the incompatibility of Porter's generic strategies (Karnani, 1984; Miller and Friesen, 1986; White 1986; Hill, 1988; Mathur, 1988; Murray, 1988; Miller, 1992; Dess and Miller, 1993; Johnson and Scholes, 1993; Feurer and Chaharbaghi, 1994). This disparity may be associated with the differences in the nature of the hospital industry in the United States and Slovak Republic. The major divergence may be rooted in the different nature of the health care market and the current stage industry evolution (Porter, 1980). The "stuck -in-the-middle" approach may represent the only practical strategy for dynamic hospital managers, given the current still highly regulatory and controlled environment. It may represent a transitional phase in the development of the Slovak health care system.

Reform of the Slovak health care aims to replace the monopolistic state hospitals with more competitive and independent providers of health care. The health insurance companies were introduced as third party payors and the hospitals were assigned some limited legal autonomy. But the situation differs from the classical markets in a number of key ways. On the supply side, as with conventional markets, there is a competition between hospitals. However, in contrast to conventional markets these organisations do not necessarily exist to maximise their profit, and the majority of them are not privately owned. On the demand side, consumer purchasing power is not expressed in financial terms. Instead, it takes a form of an allocated budget spent by a third party - the health insurance companies (HICs) on behalf of the patient. The state, in the form of the Ministry of Health, is still the most powerful stakeholder in the hospital industry. By directly nominating the hospital directors and controlling key resources, by allocating the prospective budgets to the hospitals the full operation of the purchaser-provider split is heavily restricted. What has emerged is a form of organisation that is neither market nor a centralised state bureaucracy. This situation differs from the more conventional markets in the US health care industry and is more similar to the "quasi market" in the UK NHS (Kitchener and Whipp, 1998; Donelly, 1999). In terms of industry evolution the Slovak hospital industry could be characterised as fragmented (Porter, 1980), having a large number of small and medium sized mainly state owned hospitals, with absence of market leaders, and with high exit barriers (mainly social and political) that hold back consolidation.

In contrast, the US hospital industry is characterised by a more conventional market, high competition for market share and competitive issues shifted to cost and service. These increased pressures result in consolidation encompassing three elements: hospital mergers, acquisitions, and joint ventures; the increasing size and visibility of hospital chains, especially on the for-profit side; and the emergence and increasing prominence of regional hospital systems. In 1995 50 per cent of all for-profit hospitals were owned by two for-profit chains (Zelman, 1996). The proportion of hospitals that remain non-profit is still well over 80 per cent; 56 per cent are owned by non-profit corporations while only 31 per cent are owned by government (Boisture, 1994). In terms of industry evolution these attributes signal a mature market (Porter, 1980). He argued that the consequences of being "stuck in the middle" are most apparent during the transition to maturity. Maturity forces companies to clearly choose from among the generic strategies.

The arguments presented addressed only some of the possible contingencies that could cause the disparity among the results of Kumar et al. (1997) and this study. The different sample (non-government versus government), the different "market" structure (conventional versus quasi-market), and the different industry evolution (fragmented versus mature). The exact relationship of these contingencies with the optimal strategies has to be proven by future research. Nevertheless, It appears probable that with the evolution of the Slovak hospital industry other strategies could be associated with superior performance.

Limitations of the study

An obvious limitation of this study has been its exclusive reliance on self-report measures. It is believed that the results of validity and reliability tests discussed earlier argue for sufficient confidence in the used measures, but that a similar study with multi-method measurement should yield more powerful results (Gupta and Govindarajan, 1984).

The conduct of the study by a senior executive of the Ministry of Health confers both advantages and limitations. The advantage was that a very high response rate (94 per cent) was obtained, which would have been very difficult for an academic. The potential limitation of this approach was the common method variance problems that could stem from the need to give "desirable" responses that could lead to a compressed range in response. This issue was addressed by guaranteed anonymity of the respondents and clear expression that the objective of the data collection is scientific research and not his/her personal evaluation (Heneman, 1974). The examination of the data for this study indicated that method variance was not a significant issue for this study.

The cross-sectional nature of the data in the study restricts conclusions to those of association, not causation. The development of a time-series database and testing of the strategies/performance relationship in a longitudinal framework would provide more insight into probable causation.

The most significant limitation of this research has been its focus only on few variables pertaining to both strategy and performance, especially in the performance measurement area other measures may be more specific for measurement of efficiency and effectiveness. In future research, more precise measures of issues such as quality of services would be advantageous.

Conclusion

Economic viability and survival depend on making sound strategic choices regarding the mission and role of the hospital, its operations, its relationships with its customers, and relationships to other entities in the health care, business and regulatory environments (Swinehart and Zimmerer, 1995).

This study is the first step in exploring the strategic response of the hospitals to the health care transformation process in the Slovak Republic. It has revealed that most hospitals responded by identifying with one or more of Porter's generic strategies. It has also indicated that 13 per cent of the hospitals still seem to rely on the experience learned in the past, and adopt a passive reactive "wait-and-see" approach. It has been shown that significant differences in performance can be associated with Porter's pure or hybrid strategies.

However the findings are not consistent with Porter's (1980) original contention that the generic strategies of cost leadership and differentiation are mutually exclusive. In contrast, the results suggest that a hybrid strategy may be associated with superior performance. This view is strongly supported by many recent researchers (Karnani, 1984; Miller and Friesen, 1986; White 1986; Hill, 1988; Mathur, 1988; Murray, 1988; Miller, 1992; Dess and Miller, 1993; Johnson and Scholes, 1993; Feurer and Chaharbaghi, 1994).

It seems that in the present market, the concomitant application of all three of Porter's generic strategies creates competitive advantage, which is also associated with superior performance. Whether this results in sustained competitive advantage, called also strategic advantage by Chaharbaghi and Lynch (1999), appears questionable. The differentiators and/or focused differentiators could become a more evident force in the market if for-profit hospitals or hospital chains enter the market, or if the current regulatory and controlled approach to access to capital by public hospitals is ceased. Access to capital represents the key element in determining whether an organisation pursues a differentiation strategy (Zelman, 1996) and this may change the present strategy/performance relationship radically.

The data from this survey indicate that, in the current situation, some strategies create competitive advantage. Nevertheless, organisations have to achieve sustained competitive advantage to perform better than their competitors. And sustained competitive advantage is not a static but dynamic concept (Chaharbaghi and Lynch, 1999). Therefore it seems necessary that organisations adapt their strategy continually to the changing market circumstances, based not only on their present resources, competencies and capabilities, but also on resources, competencies and capabilities that seem to be crucial for the future. If they do not possess the latter, they have to accrue and develop them. They have to concentrate not only on short-term effects but also on long-term ones. That represents the only way by which they do not sacrifice their future. The interpretations of the findings of this study may help them in this process.

The results of the study also indicate that the findings of the international studies about implications of Porter's generic strategies seem to have only limited applicability for the Slovak Republic context at the present time, and their generalization and application to the Slovak health care industry has only limited value. Research in the field of health management in the national context is therefore recommended, to create a broader basis for decision making of the Slovak health care managers.

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