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Objective. To contribute to the debate as to whether strategic change helps or harms organizations by empirically examining how strategic change influences performance change in urban hospitals.

Data Sources. AHA Annual Survey (1994 and 1996), Health Care Financing Administration’s Medicare Cost Reports (1994 and 1996) and Medicare HMO Files (1994), U.S. Bureau of the Census’ County Business Patterns Files (1994), and Area Resources File (1994).

Study Design. This work employed a longitudinal approach using a panel design to study the effect of environmental and organizational characteristics on urban hospital strategic behavior and performance. A path analytic model was used to examine the simultaneous effects of environmental and organizational characteristics (1994) on strategic behavior (change in strategies to enhance HMO business and change in strategies to con trol costs 1994-96), as well as the effects of all of these variables on change in urban hospital performance (change in market share, change in operational efficiency, change in financial performance 1994-96).

Principal Findings. (1) Environmental context exerts a greater influence on urban hospitals’ HMO business enhancement strategies, whereas organizational characteristics have more influence on cost-control strategies. (2) Between tire two strategies, HMO business enhancement and cost control, strategic change to enhance business with HMOs is much more complex. (3) Strategic change observed across the 1994 to 1996 time period can be either helpful or harmful to urban hospitals. A strategic change that contributes positively to one type of performance can negatively impact the other.

Conclusions. Although differences of opinion persist in the strategic change debate, results of this study indicate that strategic change can be helpful or harmful to urban hospitals, arid its consequences are far more complex than previously thought. Strategic rationality has its own limitations and cannot alwavs be relied on to yield expected results. Hospital strategic changes require coordination to achieve greater performance results.