Goal programming and international expansion in the hospital industry.

One service industry that has undergone fundamental change in the past 15 years and currently faces an increasingly turbulent environment is the U.S. hospital industry (Ginn, 1990; Zinn, et al., 1994; Zinn, 1997; Johnson, 1995; Sumner and Moreland, 1995). As growth potential in the U.S. market declines and regulatory constraints increase, international expansion offers U.S. proprietary and nonprofit hospitals opportunities for supplementing diminishing returns (Zinn, 1997; Zinn et al., 1994). International expansion is a sensible tool for risk reduction because these markets represent noncompetitive outlets for unspent specialized resources in production, marketing, and management (Singh and Montgomery, 1987).

International expansion of hospital services has gained momentum in the 1990s (Pallarito, 1997; Zinn, 1997; Zinn et al., 1994). For example, Columbia/HCA Healthcare corporation, the U.S.A.'s largest hospital company, reports recent expansion and joint venture activity in England, Switzerland, and Spain (Columbia/HCA Healthcare, 1998). Further, some foreign governments have recently begun divesting indigent-care hospitals at prices far below their appraised value (Pallarito, 1997). Florida-based Adventist Health System is reported to have purchased such a foreign hospital approximately 50% below the appraised value (Pallarito, 1997). Thus, it appears that international hospital expansion is a growing phenomenon and merits further research. However, in order for international expansion to be successful, hospital chains must identify countries that offer favorable environments within which to operate and individual hospitals within those countries that offer a good fit with the hospital chain's overall strategy.

Unfortunately, many hospitals that pursue international expansion as a strategy do not always select the best expansion sites (Pallarito, 1997; Nemes, 1991). Often this is because they do not fully understand the multiple relationships when locating in a new business environment. Moreover, there are conflicting theories in the international expansion literature (e.g., Williamson, 1985; Dunning, 1988, 1998; Erramilli and Rao, 1993; Agarwal and Ramaswami, 1992). For example, transaction-cost theorists argue that expansion decisions should be made based on a comparison of the costs of contracting out firm activities to that of internalizing those transactions (Williamson, 1985; Gatigon and Anderson, 1988). On the other hand, the eclectic approach suggests that transaction-cost theory by itself is insufficient and that the determining factors should be ownership advantages of a firm, location advantages of a market, and the advantages associated with internalizing transactions within a single hierarchy (Agarwal and Ramaswami, 1992). More recently, Dunning (1998) argued that the location of the expansion site is the most critical factor in determining the success of that expansion.

This lack of consensus on efficient expansion is further compounded by the fact that international expansion is a two-stage process. First, the hospital chain must determine which country offers the best markets and overall operating environment. Once the best country is selected, the hospital chain must determine which hospitals within the country offer the best strategic fit. Previous models have failed to deal with many of these complex issues and have also failed to break the international expansion process into two stages. The goal of this study is to extend previous models in order to provide hospital managers with a more effective and efficient model for making international expansion decisions.

Accordingly, this article develops a two-stage model for international expansion. The first stage selects the optimal country for expansion, and the second stage selects the optimal hospital(s) for acquisition within the country chosen in stage one. The remainder of this article will review previously used international business models, explain the proposed International Hospital Selection Model, provide an application of the model, and conclude with a discussion of managerial implications, limitations, and directions for future research.

A REVIEW OF PREVIOUS INTERNATIONAL BUSINESS MODELS

Over the past 30 years several models have been developed to aid management in the identification and analysis of the multiple relationships that must be dealt with by firms operating in multinational situations (Farmer and Richman, 1964; Estafsen, 1970; Kugel, 1973; Haner, 1980; Leontiades, 1985). One problem with basing international expansion decisions on prior international business models concerns the large amount of time that it takes to generate useful information about one or more of the expansion sites analyzed by the model. This is because these models rely entirely on human resources to input company data into the model which then transforms that data (through the use of a tabular procedure) into useful output on which to base an expansion decision. Another problem is that none of these models look specifically at the hospital industry.

One model that specifically examines the hospital industry is the two. dimensional model for international market selection developed by Zinn et al. (1994). Their two-dimensional model categorizes countries according to government receptivity and industry growth potential. Their model clearly establishes that different countries offer vastly different environments for hospital operation. For example, the U.S. government over the past decade has placed heavy emphasis on cost containment. This factor, coupled with the possibility of some type of national health care reform, indicates that the U.S. government is less receptive than other governments to expansion in the hospital industry. These factors place the U.S. market squarely in the low-growth, low-receptivity category, and suggests that there is limited opportunity for lucrative investment by domestic or foreign hospital chains (Zinn et al., 1994). In contrast to the U.S., the Pacific Rim region of Australia, Singapore, and Malaysia has governments that are highly receptive to foreign investment in health care. The Pacific Rim region also is growing in economic strength and prosperity as a manufacturing center. These factors create a potentially large unmet demand for hospital services in an increasingly affluent population. Thus, the Pacific Rim region offers a high-growth and high-receptivity environment for international hospital expansion.

Given that different countries offer vastly different environments for hospital operation, the current article builds on the two-dimensional model developed by Zinn et al. (1994) and on previous international business models. In this article, we develop a model for international expansion that combines the concept of strategic management, the management science technique of goal programming, and micro computer technology to provide a more efficient and effective framework on which to base international hospital selection decisions. That is, this article extends the Zinn et al. (1994) two- dimensional model by developing a more comprehensive and flexible model which uses as many variables (i.e., critical success factors) as the decision-making team deems important. For example, the application described in this article uses eight variables including projected host country labor costs, political stability, average occupancy rates, and economic outlook. In practice, the model can incorporate an unlimited number of variables.

Therefore, this model extends previous models not only by considering multiple critical success factors, but also by considering inter- and intra-market factors. Once the model is developed it will be applied to an example decision involving the selection of an international expansion site for a U.S. hospital chain.

THE INTERNATIONAL HOSPITAL SELECTION MODEL

The field of business strategy deals with the process of matching or fitting the organization with its changing environment in the most advantageous way. This includes adapting the organization itself (via internal changes) to fit the external environment or in some cases changing the external environment (via international expansion) to fit the internal environment. The International Hospital Selection Model, shown in Figure I, uses the concept of strategic management to match the firm with the country (and the hospital(s)) which best meets the firms' international expansion needs. As can be seen in Figure I the model has two-stages.

The purpose of stage one of the model is to determine what external environmental factors a country should have to fit most advantageously with the hospital chain's overall strategy. These external environmental factors are referred to as the country's critical success factors (CSFs) since they are critical to the expansion site's future success.

The purpose of stage two of the model is to determine what attributes a future hospital site (within the country selected in stage one) should have to fit most advantageously with the hospital chain's overall strategy. These attributes are referred to as the hospital site's critical success factors (CSFs) since they are also critical to the expansion site's future success. The steps that make up each stage of the model are basically the same (i.e., once an optimal country is identified in stage one of the model, the same steps are then applied in stage two of the model in order to identify the optimal hospital in that country). Each step and how it is applied to each stage of the model is discussed below.

Step One: Determination of Critical Success Factors