Making Strategic Decisions

BUSS4 - Making Strategic Decisions

Strategic Decisions The word strategy means a plan for

meeting your objectives Strategic thinking means visualising what

you hope to achieve within the coming years, assessing the strengths of your business in relation to those aims, then identifying an approach that can enable you to get there

This is normally done at a senior management level

A strategic plan will then be put in place Strategic decisions are the result of

strategic thinking Examples

In 1990 Nokia decided to move from being a car tyre maker to the mobile business

In 2001 Northern Rock decided to move from a building society to be a major bank

These can be contrasted with day to day decisions - tactical decisions

Insert table 51.1 P366

Important influences on strategic decision makingRelative power of stakeholders In the 1990s Arsenal FC were doing well Trophies kept coming and their main rival was

Manchester United The supporters loved the club, the manager

and the ground (Highbury) They felt sure the good times would keep

coming Arsenal’s directors were not so sure Man U were gradually expanding Old Trafford

to take twice the number of people that Arsenal could take

If Man U could generate twice the income how would Arsenal be able to compete?

They made the strategic decision to move to the 60,000 seat Emirates stadium

They were able to do this because Arsenal shares were held by a few wealthy people

If the shares had been held by the public this may not have been possible

Directors can make bold decisions only if they are supported by shareholders (if it is a plc)

Important influences on strategic decision makingAvailable resources Arsenal’s GBP400m gamble was very difficult to finance

but it proved possible In other cases a business may have a brilliant idea but be

unable to secure the necessary finance It may lack the internal finance and find it impossible to

persuade outsiders It depends on how willing banks are to lend Top companies try to make sure they always have enough

cash to put strategic decisions into practice In 2007 Apple had $16bn of cash and cash investments on

its balance sheet Tesco was in a very strong position in 2007 to declare that

in the following 5 years it would invest GBP250m a year in building stores in America

Ethical Position Firms nowadays have to make strategic decisions that are

ethical Innocent had done little to deserve its reputation as an

ethical business but people thought it was Because this was working so well it decided to maintain its

socially conscious image by switching to fully recyclable packaging and giving 10% of profits to social causes

Different approaches to strategic decisions There are two alternatives – evidence based (scientific) or hunch Either method can be successful or unsuccessful There is no evidence that either is better In 2007 Whitbread Plc went through a detailed analysis of the

four operating divisions of its business It decided that it could sell its dog and its cow and concentrate on

its 2 rising stars The dog (the restaurants including Beefeater) were difficult to sell The cash cow (the David Lloyd Leisure centres) were sold for

GBP925m In this case the strategic decision was based on evidence of

financial performance It was logical – perhaps scientific In 2007 Richard Branson said he wanted to buy Northern Rock This was before there was a clear understanding of the Bank’s

difficulties He was acting on a hunch He would no doubt have got his accountants to check he

numbers before signing anything but he made a strategic decision to place himself at the centre of the Northern Rock affair

Branson has made a huge success by making hunch decisions

The significance of information management The bosses of most plcs make their decisions on

the basis of data, not hunches Therefore information management is crucial You need to have full knowledge of your own

business This might seem obvious but firms are often too

large to be aware of everything In Jan 2008 a major French bank found that one

of its own employees had been gambling with 50bn Euros of the bank’s money

A huge bank that, one week, was considering plans for its long term future, was, the next week, fighting for its short term survival

Few business have such large problems but it is not unusual to find out too late that sales are worse that expected

Good companies have good, up-to-date information about themselves

This requires IT systems that show instantly how the business is doing so that senior directors can think quickly about whether current strategies are working

If they are not it is time for a radical rethink

Issues for Analysis Chief Executives of plcs are paid huge sums of money to

run large businesses on behalf of shareholders The high sums are paid because these firms have to attract

people who can get strategic decisions right Tesco’s Sir Terry Leahy had successfully steered the

company into eastern Europe and the Far East so shareholders trusted his 2007 decision to spend GBP1,250m moving Tesco into America

He will have gathered as much information about the US grocery market as possible but ultimately the decision will be made as much on the basis of a hunch (back by huge experience) as on the basis on scientific evidence

When you are looking at a business situation in an exam you should ask these key questions Did the business do all it could to gather data? Has the business made effective use of relevant assets

(including the expertise within its staff)? Does the leadership have the experience and wisdom to make a

sound judgement and then ensure that the new approach is carried through effectively?

Has the business got the financial and human resources to turn the right idea into the right strategy?

Evaluation If the strategic thinking is right then

the strategic decisions should be right Sometimes pressures upon decision

makers lead to mistaken compromises Shareholders who are unhappy about

short term profitability may not be willing to back a strategic decision that has a 5 year time frame

Short term cost cutting may be the only language the shareholders understand

It is the job of the highly paid chief exec to find the right balance between what is right and what is acceptable