Margin or Mission? Understanding the Relationship Between Multilevel Functional Subgroups and Pricing

This study extends the behavioral theory of the firm by examining how functional subgroups within organizations influence strategic decision-making differentially across hierarchical levels. We argue that a larger proportion of managers in a specific functional subgroup within an executive team causes this group to focus the organization’s strategic agenda on those issues that this functional subgroup considers most important. However, within a functional subgroup, the issues to which managers pay attention can vary between hierarchical levels, with senior managers’ attention shaped by higher-level strategic schema, and lower-level managers’ attention shaped by local, more operational stimuli. We test our theory using data from 1,064 U.S. hospitals, 6,218 executives, and Medicare-adjusted pricing for hospitals’ shoppable services. Our analysis focuses on two key functional subgroups: the revenue subgroup, which focuses on financial sustainability, and the medical mission subgroup, focused on quality and accessible healthcare. We find that a higher proportion of revenue-focused managers at the system level is associated with higher insured pricing. In comparison, a higher proportion of system-level medical mission managers is associated with lower pricing. Interestingly, at the hospital level, a greater proportion of medical mission managers correlates with higher insured pricing, likely reflecting efforts to secure additional resources. Posthoc analyses further clarify the mechanisms behind these relationships. Our results highlight that functional subgroups are not monolithic; their managers’ perspectives can vary with their relative position in the organizational hierarchy, and this can provide an important mechanism of conflict resolution.

Funding: D. Albert acknowledges generous support from the Freddie Reisman Faculty Scholarly and Creative Activity Award and the Dean R&R Microgrant at Drexel University. J. Eklund acknowledges generous support from the Undergraduate Research Assistant Program at the University of Southern California.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2024.19020.