INTRODUCTION

The challenge of growing health care costs has led to many changes in the health care industry. These include attempts to stabilize health care costs and delivery organizations through interorganizational linkages (D’Aunno and Zuckerman, 1987) and affiliation in strategic alliances (Kaluzny, Zuckerman and Ricketts, 1995). Such linkages may have face validity as effective strategies, with the connections between organizations suggested to be among the most important buffers organizations make to protect their technical core (Thompson, 1967). However, the patterns by which organizations connect or bridge themselves to their environments may have detrimental or enhancing effects on organizational survival (Scott, 1995).

Assessing the value of different types of interorganizational linkages is a particularly important question in the health care industry because strategic alliances, through loosely coupled or more formal interorganizational arrangements, are growing in importance. In fact, they are considered by some to be imperative to the effective and efficient provision of health services (Thorpe, 1995). For example, a survey of senior executives from 508 hospitals indicated in 1995 that only 4% of the hospital executives believe that remaining independent is a promising strategy over the next decade as compared to 18% holding this attitude in 1990 (Watson Wyatt Worldwide, 1995). This leads to an important empirical question: What types of interorganizational linkages enhance or inhibit organizational survival? This paper addresses this question in a sector of the health care industry by examining the effect of interorganizational linkages on the survival of 124 private for-profit and not-for-profit alcoholism treatment centers during the period 1989-1994.

 

THE ALCOHOLISM TREATMENT INDUSTRY

To set a context for the importance of interorganizational linkages for the survival of private alcoholism treatment organizations we point to the challenges of change that the alcohol treatment industry faced in the late 1980s and early 1990s. Central is the transition, during the period of the study, from a climate of relatively uninhibited industry growth and expansion to a changing and challenging environment, characterized by threats to the legitimacy of the centers' service delivery, enhanced external control over the flow of third party payments to them, and changes in their relationships with external constituents. These changes have important implications for the effects of interorganizational linkages on the survival or demise of organizations in the alcohol treatment industry.

The challenges concerning treatment efficacy and cost containment evolved into a change in the structure of control wherein purchasers were able to make costly and conflicting demands on the centers, and set the stage is set for the research questions and research strategy guiding the present study. The treatment centers' transition to the external environment of the 1980s was characterized by questioned legitimacy (Suchman, 1995) and private sector cost containment efforts that in effect changed the rules of third party payments for treatment, changing the resource dependence on interorganizational linkages that the treatment center organizations had to satisfy to survive.

 

HYPOTHESES

Survival is an important goal of organizational strategy (Porter, 1991). In many industries, the high rate of organizational dissolution means that continued operation of an organization becomes a serious goal. Organizational survival depends, in large part, on the ability to gain access to resources (Pfeffer and Salancik, 1978). Since organizations are not self-contained systems, they need to obtain resources from other organizations, such as customers and suppliers (Cameron et al, 1987). Determining the optimal approach to gaining access to and control over needed resources is an important strategic question (Aldrich and Pfeffer, 1976; Pfeffer and Salancik, 1978). The answer to this question is related to the question of when bridges to other organizations in the environment (Thompson, 1967) have organizational consequences, either for good or ill (Scott, 1995).

Organizational decision makers can choose between two broad alternatives to obtain resources from other organizations. They can create dense linkages to other organizations or they can avoid such strong interconnection (Pfeffer and Salancik, 1978). Organizations can be said to have dense linkages to other organizations when they have formal or informal agreements to engage in activities that influence each other’s ability to interact with the environment (Bresser and Harl, 1986). Organizations establish dense linkages, or strategically connect themselves to aspects of the environment, to reduce environmental uncertainty (Astley and Fombrun, 1983a) by augmenting the predictability of actions (Bresser and Harl, 1986).

A significant literature has emerged, however, that argues that the benefits of interorganizational linkages are conditional (Scott, 1995) on the extent that these linkages provide resources to the organization at a low cost (Bresser and Harl, 1986). This research stream provides a three-part explanation for the negative effect of interorganizational linkages on organizational survival. It shows that if linkages reduce organizational autonomy, allow organizational stakeholders to impose costly and conflicting demands on organizations, and are not munificent, then organizational survival will be adversely affected by linkages. In the sections below, we develop specific hypotheses about the effect of each of these explanations on the survival of organizations.

 

Autonomy

One of the disadvantages of creating linkages with other organizations is that linkages may reduce an organization’s decision-making autonomy (Provan, 1984). An external constituent’s involvement in strategic decisions makes it is more difficult for the organization to adapt to environmental change (Oliver, 1991). Reduced autonomy makes it difficult for organizations to make unilateral decisions in response to the actions of their competitors (Provan, 1984). Collective decisions are disadvantageous for several reasons. First, they are often jointly optimal for the two organizations, rather than maximally optimal for each of the organizations individually (Oliver, 1991). Consequently, linked organizations often need to make compromise decisions which conform to those of the partner. To illustrate: In alcoholism treatment centers, the simplest and lowest cost treatment and care are optimal for many organizational constituents which provide clients and pay for treatment. While this provides patients, accommodation to these demands however is often less than optimal for the treatment centers themselves which have to adjust operations to reflect the cost of this reduced treatment.

Second, collective decisions may be more difficult to reach than individual decisions (Pfeffer, 1981). More people need to be involved in making decisions when organizations have linkages. Consequently, the process of making joint decisions consumes more resources (Provan, 1984), faces greater constraints, and reduces the speed and ease of response (Pfeffer and Salancik, 1978). Such could be the case when an alcoholism treatment center is a subsidiary of a larger organization.

Third, the investment in the linkage itself becomes a sunk cost that increases the organization’s commitment to one strategy at the expense of others (Bresser and Harl, 1986). Consequently, organization members begin to justify their actions (Janis, 1972; Staw, 1981), "create illusions of invulnerability, censor information, suppress dissent, or become locked into a decision making impasse if conflicting interests appear irreconcilable" (Bresser and Harl, 1986: 412). This makes it more difficult for organizations to engage in exploratory problem solving (Orton and Weick, 1990) or to focus on strategies other than the collective one (Gottfredson and White, 1981; Janis, 1972; Staw, 1981). Unable to focus on other strategies, the organization reduces its ability to adapt to environmental change (Bresser and Harl, 1986). For example, an alcoholism treatment center may become heavily committed to planning and allocating limited resources to treatment strategies geared to particular organizational "customers."

Fourth, in the absence of autonomy, interorganizational linkages create a boxcar effect which amplifies the impact of external influences on the organization (Bresser and Harl, 1986; Aldrich, 1979; Pfeffer and Salancik, 1978; Weick, 1979). Unable to seal off the adverse external environmental influence to its linkage partner, the organization must absorb that effect as well as ones directly affecting it (Cameron et al, 1987). By contrast, in the absence of tightly coupled linkages, the effect of external changes can dissipate before reaching the organization and the organization can avoid more adverse environmental effects (Weick, 1976; Schoonhoven, 1986).

In the alcoholism treatment center industry, loss of autonomy can become quite problematic when it affects decisions over items such as new treatment programs or standards for quality care (Provan, 1984). Therefore, organizations which reduce their autonomy through interorganizational linkages should be less likely to survive than should other organizations. This argument leads to the first hypothesis:

H1a: Interorganizational linkages which lower autonomy over decision making concerning treatment policies will decrease the probability of treatment center survival.

H1b: Interorganizational linkages which lower autonomy over staffing will decrease the probability of treatment center survival.

 

Multiple Referral Sources

When organizations create linkages with their external constituents, they have a choice of establishing such relationships with many or few external constituents. The establishment of linkages with multiple external constituents can be disadvantageous. The creation of multiple external linkages allows a larger number of external constituents to exert influence over an organization (Pfeffer, 1982), with three adverse effects on organizational survival. First, multiple linkages increase the number of external constituents that the organization must monitor against opportunism (Williamson, 1975). Since the marginal cost of monitoring of an existing external constituent is less than the average cost of monitoring a new external constituent (due to up-front costs in establishing a monitoring relationship), the addition of new linkage partners raises monitoring costs. Monitoring consumes resources, and resources expended on monitoring at the expense of serving the organization’s customers increases the likelihood of organizational failure.

Second, when organizations create linkages with external constituents, they must expend resources to accurately perceive the demands of their external constituents and the relative power of each (Pfeffer and Salancik, 1978). The more linkages the organization creates, the more resources that must be spent gathering information about linkage partners. This increase in expenditures has an adverse effect on the ability of the organization to meet customer demands.

Third, different organizations have different goals. The more external constituent organizations with which an organization has linkages, the more often these goals will conflict. When the goals of linkage partners conflict with each other, it is difficult for the organization to respond effectively to all of them simultaneously (Pfeffer and Salancik, 1978). As a result, divergent forces may drive the organization in conflicting directions and inhibit its ability to serve its market (Luke et al, 1989).

In the context of alcoholism treatment centers, clients are referred from external constituents. Treatment centers may build caseloads by linkages to a few large sources of clients or a large number of smaller sources of clients. Organizations which have linkages to larger numbers of referral sources should be less likely to survive than should other organizations. This argument leads to the second hypothesis:

H2: Dispersed interorganizational linkages will inhibit treatment center survival.

 

Munificent Linkages

When organizations create linkages with their external constituents, they can establish linkages with munificent or non-munificent external constituents. Munificent linkages are linkages with organizations that provide resources at relatively low cost in term of demands that are made in return. Munificence may in some instances be the external source of what is experienced internally as "organizational slack." The establishment of linkages with munificent external constituents enhances organizational survival. External constituents that place fewer demands allow organizations to accumulate slack management time for dealing with environmental shocks (Cyert and March, 1963; Galbraith, 1973). Since "organizations can more readily cope with conflicting demands when they have sufficient resources .... many demands can be at least partially satisfied simultaneously" when linkages are with external constituents (Pfeffer and Salancik, 1978: 274).

Organizations which establish more munificent referral linkages should be more likely to survive than other organizations. Until recently, linkages with government agencies and programs that were sources of clients through diversions from the legal system (Weisner, 1987) and a societal preference for medicalized responses to deviant behavior (Roman, 1980) were more munificent for the alcohol treatment center industry than such referral linkages from private sector sources. Government agencies and programs referred clients to alcoholism treatment without direct concern for or management of the costs; while private sector firms have led the way in terms of adopting managed care strategies to minimize their expenditures associated with the costs of treatment for employees and their dependents. Private sector firms often have an interest in determining the type of treatment used through the agency of their EAP staff or contractors, while government agencies rarely have had a parallel capability.

There may be a useful qualitative distinction between the relative munificence stemming from linkages to the public sector and the private sector. The public sector linkages may be less negotiable and may accrue lower unit value but are more predictable and less demanding in terms of client flow once a linkage is established. By contrast, the private sector referrals may have more immediately valuable "windfall" features but may be considerably less predictable and more demanding in terms of agent involvement and client flow and therefore detrimental to planning and efficient resource allocation. Even though the relative munificence of linkages with the public and private sectors may vary during different historical periods, the munificence of these linkages have implications for organizational survival. This argument leads to the third hypothesis:

H3a: Interorganizational linkages with public sector organizations will enhance the probability of treatment center survival.

H3b: Interorganizational linkages with private sector organizations will inhibit the probability of treatment center survival.

 

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Last Updated 1/15/97 by Geoff Goldman & Dennis Valencia

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