3.decision making in strategic management
TRANSCRIPT
What makes a decision strategic?
Rare- Strategic decisions are unusual and typically have no precedent to follow.
Consequential-Strategic decisions commit substantial resources and demand a great deal of commitment from people at all levels.
Directive-Strategic decisions set precedents for lesser decisions and future actions throughout the organization.
MINTZBERG’S MODES OF STRATEGIC DECISION MAKING
Some strategic decisions are made in a flash by one person who has a brilliant insight and can quickly convince others to adopt his idea. Other strategic decisions often develop out of a series of incremental choices that overtime push the organization more in one direction than another. According to Henry Mintzberg there are 3 most typical approaches or modes of Strategic decision making. The fourth was added by Quinn.
Entrepreneurial Mode The focus is on opportunities and
problems are secondary Strategy is guided by the founder’s own
vision and direction and is exemplified by large bold decisions
The dominant goal is the growth of the corporation
Adaptive Mode Sometimes referred to as “muddling through” This decision making mode is characterized by
reactive solutions to existing problems rather than a proactive search for new opportunities
Strategy is fragmented and is developed to move the corporation forward incrementally
This mode is typical of most universities, many large hospitals, a large number of government agencies and a surprising number of large corporations.
Planning Mode This involves systematic gathering of appropriate
information for situation analysis, the generation of feasible alternative strategies and the rational selection of the most appropriate strategy.
It includes both proactive search for new opportunities and the reactive solution to existing problems.
Although this mode seems to be a more rational way for strategic decision making it has been criticized for ignoring the implementation aspect and for its failure to manage change.
Logical Incrementalism This was later added by Quinn and it is a hybrid of
planning, adoptive and to a lesser extent the entrepreneurial modes.
With this mode the top management has a reasonably clear idea of the corporation’s mission and objectives but in its development of strategies it chooses to use an interactive process in which the organization probes the future, experiments and learns from a series of incremental commitments rather than global formulations of total strategies
Thus although the mission and objectives are set the strategy is allowed to emerge out of debate.
This approach is useful when the environment is changing rapidly and when it is important to build consensus and develop the needed resources before committing the entire corporation to a specific strategy.
key
1a =Evaluate current performance results in terms of return on investment & profitability
1b =Evaluate the current mission,objectives,strategies and policies
2 =Review corporate governance – the performance of the firms board of directors &top management
3a=Scan and assess the external environment 3b=Analyze the external factors-opportunities& threats 4a=Scan and assess the internal corporate
environment- culture, structure & resources 4b=Analyze the internal factors-strength (core
competences) & weaknesses
key
5a=Analyze strategic factors (SWOT) to pin point problem areas
5b=Review and revise the corporate mission & objectives as necessary
6=Generate, evaluate and select the best alternative strategy in light of the analysis conducted in step 5
7=Implement selected strategies via programs, budgets & procedures
8=Evaluate implemented strategies via feed back systems and the control of activities to ensure minimum deviation from plans
The central purpose of the formal planning mode is to identify strategies that align, fit or match a company’s resources and capabilities to the demands of the environment in which the company operates;- to match the company strengths and weaknesses with environmental opportunities and threats. Although the research evidence seems to indicate that such planning do help companies make better decisions in recent years scholars like Thomas J.Peters and Robert H.Waterman have raised doubts about the usefulness of the formal planning systems as an aid to strategic decision making. Below are the explanations as to why strategic planning systems do not produce better results.
CRITICISM OF FORMAL PLANNING SYSTEMS
Planning equilibrium For management technique such as formal
planning to be a source of competitive advantage, some companies must have the techniques while others do not.
Currently every company has some kind of formal strategic planning process hence a condition planning equilibrium exists.
Thus planning equilibrium may be necessary to enable a company earn average profits but it will not by itself allow a company the above average profits associated with competitive advantage.
Planning under uncertainty
The most common mistakes is for executives to assume that it is possible to forecast the future accurately
The future is inherently unpredictable and because of this even the best laid plans can fall apart if unforeseen contingencies occur
Rather than try to forecast the future planners should attempt to model the company’s environment and then use that model to predict a range of possible scenarios.
Over 50% of the fortune 500 companies use scenario planning methods.
Ivory Tower Planning
Most companies treat planning as an exclusively top management function
This ivory tower results into strategic plans being formulated in a vacuum by planning executives who have little understanding or appreciation of operating realities
As a result operating managers may resist or refuse to implement the plans imposed on them by the top executives
Strategic intent versus strategic fit
Strategic fit refers to an attempt to align, match or fit a company's resources and capabilities to the demands of the environment in which the company operates
A number of scholars have attacked the fit model as being too static and limiting
They argue that adopting the fit model to strategy formulation leads to a mind set in which management focuses too much on the degree of fit between the existing resources of a company and current environmental opportunities and not enough upon building new resources and capabilities to create and exploit future opportunities
Strategies formulated via the fit model tend to be more concerned with today’s problems than tomorrow's opportunities which makes it unlikely for companies to build and maintain a competitive advantage.
Strategic intent versus strategic fit contd…
Strategic intent refers to an obsession to win at all levels of the organization sustained over a long period of time
Underlying the concept of strategic intent is the notion that strategy formulation should involve setting ambitious goals which stretch a company and then finding ways to build resources and capabilities necessary to achieve those goals
According to scholars like Prahald and Hamel the secret of the success of companies like Toyota, Canon and Komatsu is that they all had bold ambitions which out stripped their resources and capabilities
Pitfalls in strategic decision making
Cognitive biases The prior hypothesis bias Escalating commitment Reasoning by analogy Representativeness Illusion of control
Group think
Prior hypothesis bias
refers to the fact that decision makers who have strong prior beliefs about the relationship between two variables tend to make decision on the basis of these beliefs even when presented with evidence that their beliefs are wrong e.g. a manager who has a strong prior belief that a certain strategy makes sense might continue to pursue that strategy despite evidence that it is inappropriate or failing
Escalating commitment
This occurs when decision makers having already committed significant resources to a project commit even more resources after receiving feed back that the project is failing e.g investments in obsolete technology without resale value or alternative uses
Reasoning by analogy
This involves use of simple analogies to make sense out of complex problems e.g several companies have relied on the analogy of a three legged stool to justify diversifying into business areas of which they had little prior knowledge
Representativeness
This is a bias rooted in the tendency to generalize from a small sample or even a single vivid case
Generalizing from a sample violates the statistical law of large numbers which says it is inappropriate to generalize from a small sample.
Illusion of control
This is a tendency to over estimate one’s ability to control events.
Top managers seem to be particularly prone to this bias.
Having risen to the top of the organization, they tend to be overconfident about their ability to succeed e.g. senior managers are typically over confident about their abilities to create value by acquiring another company.
Hence they end up making poor acquisition decisions often paying far too much for the companies they acquire.
Group think
This occurs when a group of decision makers embarks on a course of action without questioning the underlying assumptions.
A group may support an idea or a policy and ignores or filters out information that can be used to question the policy and develops after-the-fact rationalizations for its decision
Group think dominated groups are characterized by strong pressures toward uniformity which make their members avoid raising controversial issues or questioning weak arguments
Two Techniques for improving decision making
Devil’s Advocacy Dialectic inquiry
Expert plan
Devils advocatecriticizes
Final plan
Expert plan1(thesis) Expert plan 2
(antithesis)
Debate (synthesis)
Final plan
Devil’s advocacy
This involves the generation of both plan and critical analysis of the plan
One member of the decision making group acts as a devil’s advocate bringing out all reasons that might make a proposal unacceptable
In this way the decision makers can become aware of the possible perils of recommended courses of action and make adjustments where necessary.
Dialectic inquiry
This is more complex and it involves the generation of a plan and a counter plan
However both plans should reflect plausible but conflicting courses of action
Corporate decision makers consider a debate between advocates of the plan and counter plan
The purpose of the debate is to reveal problems with definitions, recommended courses of action and assumptions
As a result corporate decision makers and planners are able to form a new and more encompassing conceptualization of the problem which becomes the final plan
Strategic managers and strategic Leadership
Types of managers General managers These are individuals who bear responsibility for
the overall performance of the organization or for one of its major self contained divisions. Their overriding concern is for the health of the total organization under their direction
Functional Managers These bear responsibility for specific business
functions such as personnel, purchasing, production, sales customer service. Their sphere of authority is generally confined to one organizational activity
Levels of strategic management
Corporate level(Head office)
Business Level(Division A)
Functional level(Business functions)
Functional level(Business functions)
Market A Market B
Business Level(Division B)
Market C
Functional level(Business functions)
Business Level(Division C)
Levels of strategic management
A typical business company has three main levels of management
Corporate level ,business level and functional level
General managers are found at the first two of these levels but their strategic roles differ depending on their sphere of responsibility
Corporate level The corporate level consists of the CEO, Board of Directors,
other senior executives and corporate staff This is the apex of the organization and the CEO is the main
general manager at this level His role is to over see the development of strategies for the
total organization. Typically this role involves defining the mission and goals of
the organization, allocating resources among the different business areas, formulating and implementing strategies and providing leadership for the rest of the organization
He is also responsible for managing divestment and acquisition processes and above all to ensure that corporate strategies pursued by the company are consistent with maximizing shareholders wealth
At this level managers need more of conceptual skills to be able to think for the organization ,coordinate and integrate the various organizational activities towards one common goal
Business level In a multi business company, the business level consists of
heads of individual strategic business units with in the organization. In a single industry company the business and corporate levels are the same
A strategic business unit is an organizational entity that operates in a distinct business area . In most companies strategic business units are referred to as divisions
The role of the heads of divisions is to translate general statements of direction and intent from the corporate level into concrete strategies for individual businesses
Managers are responsible for setting the individual strategic business unit objectives and aligning them with the overall corporate strategy
At this level managers require more of human relations skills to enable them motivate people to stretch and achieve organizational goals and objectives
Functional level Functional managers bear responsibility for specific
business functions Their role is to develop functional level strategies that
help fulfill the strategic objectives set by business and corporate level general managers
Since they are closer to the customer functional level managers may generate important strategic ideas which subsequently become major strategies for the company
An equally great responsibility of managers at the functional levels involves strategy implementation – the execution of corporate and business level strategies
At this stage functional managers should have more technical skills to enable them better manage specialized fields
Strategic Leadership
Strategic leadership refers to the ability of the manager to articulate a strategic vision for the company and to motivate a others (subordinates) to buy into that vision
Below are characteristics of good leaders; Vision Eloquence and Consistence –the key
task of leadership is to give the organization a sense of direction. Leaders have a vision of where the organization wants to go and should be eloquent enough to communicate this vision to others in terms that can energize others. They should consistently articulate this vision until it becomes part of the culture of the organization
Characteristics of a good leader
Commitment- a strong leader demonstrates commitment to his particular vision
Well informed – leaders should develop a net work of formal and informal sources to keep well informed about what is going on in the organization
Characteristics of a good leader contd..
Willingness to delegate power –good leaders do skilful delegation to avoid being overloaded by responsibilities. Delegation can be a good motivating tool especially when it results in decisions being made by those who must implement them. However leaders need to maintain control over certain key decisions that they judge to be of critical importance to the future success of the organization under their leadership
Political astuteness -good managers should build consensus rather
than use their authority to force ideas through. -good managers often hesitate to commit themselves
publicly to detailed strategic plans or precise objectives since the emergence of unexpected contingencies may require adoption
-ability to push through programs in a piecemeal fashion
Characteristics of a good leader contd..
Self confidence Courageous Emotionally resilient Discipline, fairness and sincerity Intelligence Physical and mental health