Everything you need to know about the different approaches to strategic decision making. Strategic decision making is the core of strategic management.
Therefore, it is desirable to understand the nature of strategic decision making. Strategic decision is a major choice of an action concerning committing of resources with a view to achieve organizational objectives.
Strategic decision-making process is so strategic that each firm has its own approaches to these strategic decision-making. Good many alternative approaches have come into practice because each firm is unique or strategic.
The differences mainly arise due to, the extent of formalisation of decision making process, move from formalised and structured to informal and unstructured, process, managerial power relationship-from the dominant role of the strategist to dilution of different interest groups; nature of management-ranging from highly complex and variable to simple and stable; the philosophy of management-ranging from highly traditional to sophisticated ultramodern thinking and application.
Strategic decision making process is complex and intriguing. Various researchers and authors have studied and described the manner in which such decision-making takes place. These different approaches have also been categorised by a few authors.
A number of approaches have been put forward to clarify how strategic decisions are made.
They are:- 1. Rational-Analytical Approach 2. Entrepreneurial Approach 3. Intuitive-Emotional 4. Adaptive Approach 5. Planning Approach 6. Political-Behavioural Approach 7. Administrative Approach 8. Incremental Approach 9. Satisfying Approach 10. Combination Approach.
Approaches to Strategic Decision Making: Rational-Analytical, Entrepreneurial, Political-Behavioural and a Few Others
Approaches to Strategic Decision Making – 4 Most Common Approaches
A number of approaches have been put forward to clarify how decisions are made.
The following are the most common approaches:
1. Rational-analytical approach,
2. Intuitive-emotional approach,
3. Political-behavioural approach, and
4. Administrative approach
Approach # 1. Rational-Analytical Approach:
Rational-analytical approach assumes that the decision maker is a ‘unique actor who behaves intelligently and rationally’. He is fully aware of all available feasible alternatives and considers all the alternatives as well as the consequences and chooses the alternative that secures the maximum gain.
Most managers like to think of themselves as rational decision-makers. And indeed, many experts argue that managers should try to be as rational as possible in making decisions. It rests on the assumption that managers are logical and rational and they make decisions that are in the best interests of the organization.
This approach follows the process as:
(a) Decision makers have complete information about the decision situation and possible alternatives.
(b) They can effectively eliminate uncertainty to achieve a decision condition of certainty.
(c) They evaluate all aspects of the decision situation logically and rationally.
This approach helps keep the decision maker focused on facts and logic and help guard against inappropriate assumptions and pitfalls.
Though this approach prescribes a rational, conscious, systematic, and analytical way, yet decisions are often made with little consideration for logic and rationality. Kepner-Tregoe, a Princeton-based consulting firm, estimates that American company use rational decision- making techniques less than 20 percent of the time.
And even when organizations try to be logical, they sometimes fail. For example, managers at Coca-Cola decided to change Coke’s formula after four years of extensive marketing research, taste tests, and rational deliberation- but the decision was still wrong. On the other hand, sometimes when a decision is made with little regard for rationality and logic, it can still turn out to be correct.
The decision maker is often not a unique actor but part of a multiparty decision situation. Decision makers are not rational enough or informed enough to consider all alternatives or know all the consequences. And information is costly. They make decisions with more than a maximization of objectives but tend to “satisfice” i.e. make a decision expected to yield a satisfactory, as opposed to “optimal” outcome. Besides, the objectives may change.
Approach # 2. Intuitive-Emotional:
Intuition is an innate belief about something without conscious consideration. Intuitive- emotional approach is opposed to rational decision-making. Managers sometimes decide to do something because it feels “right”.
This feeling is not arbitrary but based on habit or experience, gut feeling, reflective thinking, and instinct, using the unconscious mental processes. An inner sense or emotion may help managers make an occasional decision without going through a full- blown rational-sequence of steps. Intuitive decision maker considers a number of alternatives and options.
Proponents of this approach point out that, in many cases, judgment may lead to “better” decisions than “optimizing” techniques. In fact, the timing of when to implement a decision based on the analysis may require an intuitive feel for what the data are telling you.
In many cases, judgment might be preferable to relying on the analysis. Of course, all managers but most especially inexperienced, should be careful not to rely too heavily on intuition.
Approach # 3. Political-Behavioural Approach:
This approach suggests that real decision makers must consider a variety of pressures from other people who are affected by their decisions. An organization interacts with different stakeholders in interdependent exchange relationships. A stakeholder is any group or individual who can affect or is affected by the achievement of an organization’s purpose.
Unions exchange labour for decent wages and job security. Customers exchange money for products and services. Owners exchange capital for expressed returns on investment. Suppliers exchange inputs for money and on-going business. Governments exchange protection and economic security for taxes.
Even competitors exchange information with one another through trade associations or other contacts. Each stakeholder gives the organization something and expects something in return. To the extent an organization has a favorable exchange relationship compared with other organizations and stakeholders, it has more power.
More powerful stakeholders have more influence over decisions because the organization is more dependent on these stakeholders. A majority stakeholder can have a greater influence on decisions about reinvestment than if stock is widely held by many small owners.
In a labor-intensive firm, more attention may be paid to union leaders’ demands for better wages than, to the desires of stockholders for more profit, because the union might shut the firm down.
Therefore, decision makers try their best to meet the demands of the various stakeholders. This mode of decision-making suggests that the organization in which decision maker works limits the choices available.
Decisions are made when the coalitions involved in the process agree to find a solution by mutual adjustment and negotiation in the way decisions have been made in the past. The decision maker must consider the political implementation of the decision outcome.
Approach # 4. Administrative Approach:
Herbert A Simon was one of the first person to recognize that decisions are not always made with rationality and logic. His administrative model holds that managers- (i) have incomplete and imperfect information, (ii) are constrained by bounded rationality, and (iii) tried to satisfice when making decision.
Bounded rationality suggests that their values and unconscious reflexes, skills limit decision makers, and habits; by less-than complete information and knowledge. Essentially, then the concept of bounded rationality suggests that although people try to be rational decision makers, their rationality has limits.
“Satisficing” suggests that rather than conducting an exhaustive search for the best possible alternative, decision makers tend to search only until they identify an alternative that meets some minimum standard of sufficiency. A manager looking for a site for a new plant, for example, may select the first site he find that meets basic requirements for transportation, utilities, and price, even though further search might yield a better location.
People may satisfice for a variety of reasons. Managers may simply be unwilling to ignore their own motives and therefore may not be able to continue searching after a minimally acceptable alternative is identified. The decision maker may be unable to weigh and evaluate large number of alternatives and criteria. Also subjective and personal considerations often interfere with decision situations.
Because of the inherent imperfection of information, bounded rationality, and satisficing, the decisions made by a manager may or may not actually be in the best interests of the organization.
The above approaches have their own significance, yet the human being is a mix of the rational and the emotional. The environment is a mixture of the analysable and of chaotic change and pressures. Strategic management decisions are, therefore, made in a typically human way i.e. using the rational, conscious analysis and intuitive, unconscious “gut” in light of political realities.
Approaches to Strategic Decision Making – As Given by Mr. Henry Mintzberg: With its Features
Strategic decision-making process is so strategic that each firm has its own approaches to these strategic decision-making. Good many alternative approaches have come into practice because each firm is unique or strategic.
The differences mainly arise due to, the extent of formalisation of decision making process, move from formalised and structured to informal and unstructured, process, managerial power relationship-from the dominant role of the strategist to dilution of different interest groups; nature of management-ranging from highly complex and variable to simple and stable; the philosophy of management-ranging from highly traditional to sophisticated ultramodern thinking and application.
Different management veterans have classified these approaches into a definite set of categories. Mr. Henry Mintzberg, in his article “Strategy Making in three Modes” published in California Management Review-Winter 1973-pp-44-53, as Entrepreneurial Adaptive and Planning.
George A. Stener, John, B.Miner and Edmund. R.Gray, in their title “Management Policy and Strategy” published by Macmillan, N.Y., p.24 have classified these as format structured, intuitive-anticipatory, entrepreneurial opportunistic, incremental and adaptive.
Though these are five as against one given by Mintzberg H. as three, they are only extension of those basic three as given by Henry Mintzberg. What is important to note is that a particular approach of strategy making varies from others in respect of all the major steps of decision-making namely, identification of alternatives, criteria for evaluation of these alternatives, considering factors of decision-making and the outcome of decision-making process- that is-choice.
Following is the brief description of these three approaches as given by Mr. Henry Mintzberg:
1. Entrepreneurial Approach:
As the caption suggests, this approach is followed in strategic decision-making by the organisations headed by family heads where by the organisation is moulded to- face the environmental changes. In the Indian context the business groups such as Reliance, Jyoti Udyog, Nirma, Kothari Products, Mofatlal Group, Dabur Products, T.T.K. Group, and Infosys Technologies are examples.
Features of Entrepreneurial Approach:
Entrepreneurial approach to strategic decision making has its own features.
These are:
i. Capitalising on the Opportunities:
Entrepreneurial approach warrants constant search for opportunities that changing environment makes available. This searching may be formal or informal. Seeking the possible and viable opportunities and encashing them, i.e., it is not a problem solving process.
ii. Centralized Decision-Making Power:
The family head is the person who has the exclusive power of making bold and unusual decision. It is founded on rich experience of past and sound judgment that play vital role in making the head as competent authority to make decisions.
iii. Growth and Expansion Orientation:
This approach is growth and expansion-oriented. That is, there is an all-out attempt to increase the wealth, assets, turnover and market share. Growth and expansion oriented approach keeps the family of entrepreneurs on the toes, always alert and agile and keen observation of business situations is the key to their success.
iv. Efforts and Rewards are Well Balanced:
The entrepreneurial approach believes in making unusual and very bold decision in the environment of uncertainty. They keep the organisation adaptive to the changing needs of business world.
Naturally, unusual and bold decisions based on rich and unique experience and sound judgment are bound to yield rich dividends commensurate with the boldness and environmental interfacing. This means that these bold and unusual decisions are based on hard facts of changing environment.
2. Adaptive Approach:
This adaptive approach is reactive rather than proactive and tries to collect and mix the variant factors influencing the strategic decisions. It touches the very root of changing context of decision-making. This approach is very common in case of public sector enterprises where decision-making power is divided amongst different constituents.
It is a matter of governing and managing these enterprises where the objectives are social service orientation hinged by profit making. That is, though the aim is to meet the social needs the government enterprises not barred from making profit.
Features of Adaptive Approach:
The adaptive approach has its own features distinct from others.
These are:
i. It is an Exercise of Problem-Solving:
Such an approach is to solve the problem encountered which are more of survival and maintenance or continuation of existing situation rather hunting new opportunities and encashing on them.
ii. Dominance of Decision Making Process by Constituents:
These constituents we mean here the ‘publics’ that have stake in business. The decision-making process is shared by the owners, managers, government agencies, trade unions, financers and the like. The decision reflects the interests of these stake-holders.
iii. Priority Based Decisions:
This approach believes in solving one problem at a time. The most urgent problem gets the priority over others. The idea behind this is to attain and maintain highest degree of flexibility to adapt the decision to more pressing needs. Logic behind this is to use all the vigour and strength in solving effectively the most pressing problem so that they need not look back again.
3. Planning Approach:
This approach calls for making decisions in anticipation of the future state of affairs where the organisation is prepared to face it boldly. That is, strategic decisions are based on socio-economic purposes of the organisation, value of top management, external opportunities and problems on one hand and organisations strength and weaknesses on the other.
It is widely used by multi-nationals which have formalised and structured strategic decision-making process.
Features of Planning Approach:
Planning is clothed with the future and moulding organisation ready to tackle the future problems and uncertainties that are likely to be encountered by the firm.
i. Analysis of Factors Influencing a Strategy:
The process of strategy making is founded on analysis of various factors that influence the strategy. These factors are both external and internal. External factors are economic, technological, socio-cultural, political, and ecological and the internal are related with firm’s strengths and weaknesses.
ii. Systematic and Structured Approach:
Planning approach to strategic decision making involves systematic and structured approach to the solution of problems. It is more a task of assessing the cost benefit pay-offs of the possible alternatives. It is a systems approach in that the structure of organisation and its parts are geared to make possible the payoffs in terms of costs and benefits.
iii. It is a Comprehensive Process:
It is comprehensive process in that it is capable of producing a set of integrated decisions and strategies. That is, all the decisions and strategies that are inter-departmental and inter level of the organisation are supporting one another rather than supplanting.
Thus, the goal of profit maximisation or wealth maximisation is having the organisational level support and the inter departmental and inter sections support where each is limited, balanced and integrated. It is a coordinative approach.
It is evident that above three approaches are having contrasting ways for strategic decision making. It is not mandatory to follow a particular approach. In practice, to its advantage, it may select one of these or combine them to get the best results provided the combination works within the internal constraints on resources and compatibilities and external uncontrollable factors that provide threats and opportunities.
Approaches to Strategic Decision Making – With Suitability and Limitation
Strategic decision making is the core of strategic management. Therefore, it is desirable to understand the nature of strategic decision making. Strategic decision is a major choice of an action concerning committing of resources with a view to achieve organizational objectives.
It has the following features:
1. Strategic decision is a major choice of action which affects the entire organization or major parts of it.
2. It affects the long-term prosperity of the organization because the commitment is for long term.
3. It involves commitment of large amount of resources—human, financial, and physical— in implementing the strategic option chosen.
4. Because of high-level of futurity, a strategic decision is made after analyzing various factors both within the organization and its environment.
5. Since a strategic decision has major impact on the organization on long-term basis, it is made by top management which has much wider perspective of the organization and its environment.
Some examples of strategic decisions are – choice of Tata Motors to enter small-car business, divesting of its edible oil business by Hindustan Unilever, takeover of Tetley Tea by Tata Tea, and so on. Strategic decision making involves the usual decision-making process—specific objectives derived from organization’s strategic intent, search for alternatives to achieve those objectives, evaluation of these alternatives, and choice of the most appropriate alternative.
Thereafter, this choice is put into action. However, this process can be conducted by adopting different approaches. Each approach has its own risk-payoff relationship. Therefore, let us go through these approaches.
Different approaches to strategic decision making emerge because an organization may differ from other organizations in terms of:
1. Degree of formalization in decision-making process—from highly formalized and structured to informal and unstructured process.
2. Managerial power relationship—from the dominant role of the strategist to compromise of different interest groups.
3. Nature of environment—from highly complex to simple and stable.
These differences determine the kind of approach individual organizations would adopt in their decision-making process, including strategic decision making. However, various approaches that are available for adoption in strategic decision making have been described by authors differently. For example, Mintzberg has classified various approaches into three forms (he has referred to these as modes).
These are entrepreneurial, planning, and adaptive. As against this classification, Steiner et al have a five-fold classification – Formal-structured, intuitive- anticipatory, entrepreneurial-opportunistic, incremental, and adaptive. The difference between these two sets of classification can be resolved to some extent.
Formal-structured approach resembles planning approach – Incremental and adaptive approaches have common factors than differences and, therefore, can be grouped together; entrepreneurial approach is basically based on intuition and anticipation as these elements require high level of vision in strategists to anticipate opportunities and threats posed by the relevant environment. Therefore, for further analysis, three types of approaches will be taken.
These are:
1. Entrepreneurial-opportunistic approach,
2. Formal-structured approach and
3. Adaptive approach.
Approach # 1. Entrepreneurial – Opportunistic:
Entrepreneurial-opportunistic (or simply entrepreneurial) approach is adopted, generally, by heads of family-managed organizations and is characterized by pushing an organization ahead in the face of environmental odds.
The basic features of strategy making under this approach are as follows:
i. The focus in this approach is on capitalizing the opportunities rather than problem solving. There is constant search of opportunities in the environment either formally or otherwise.
ii. Decision power is centralized in the entrepreneur who is capable of making bold and unusual decisions.
iii. The bold and unusual decisions made in the face of environmental uncertainty, lead the organization to move forward by unusual leaps and thrive with corresponding gains.
iv. The most important objective in this approach is growth and expansion in assets, turnover, and market share.
Thus, decision making becomes emergent process as against formal process.
Suitability and Limitations:
Entrepreneurial approach is suitable in those organizations where key strategists have very high stake in the outcomes of a strategy. They are in a position to lead the organization from front sidelining the views of other stakeholders. Usually, such strategists have very high level of aspirations, high level of vision about the future business scenarios, and have high-risk bearing profile.
A basic advantage of this approach is that such decisions are made which may defy the basic principles of management textbooks. This is the reason that such organizations outperform their counterparts adopting formal-structured approach.
The above discussion shows only the positive aspects of entrepreneurial approach. This approach has one basic limitation that if the strategists do not have intuition and vision required for doing something new and extraordinary, the strategies are likely to fail. There have been severed such cases.
For example, Sunrise Industries entered the toilet market with Yuva and Piyu brands in 1980s. Both the products failed against the massive competition posed by then existing players particularly Hindustan Unilever. Similarly, Suraj Automobiles introduced diesel- based motor cycles to provide saving in fuel cost but the product failed. There are numerous such cases of failures. Therefore, entrepreneurial approach is not suitable for all entrepreneurs.
Approach # 2. Formal-Structured:
Formal-structured (or simply formal) approach involves strategic decision making in anticipation of the future state that the organization wants to be in. Strategic decisions are based on socioeconomic purposes of the organization, values of top management, external opportunities and threats, and organization’s strengths and weaknesses.
The basic features of this approach are as follows:
i. Strategy making is based on analysis of various factors which affect the strategy.
ii. It involves systematic and structured approach to the solution of problems and also the task of assessing the cost and benefit of various alternatives.
iii. It is a comprehensive process which produces a set of integrated decisions and strategies.
In India, most of the multinationals follow this approach in which they have formalized and structured their strategic decision-making process.
Suitability and Limitation:
Suitability and limitations of formal approach depend on type of organization, management styles and complexity of environment, complexity of production processes, nature of problems and purpose of planning system.
A basic advantage of this approach is that it generates enough information which enables decision makers to make decisions in complex situations. However, when decision system becomes too formalized and highly structured, decision-making process becomes slow because of emergence of professional bureaucracy which relies on standardization of skills. Decision making is decentralized and takes place where the expertise exists. With the result, unusual decisions are hard to come by.
Approach # 3. Adaptive:
Adaptive approach of strategic decision making is basically reactive and tries to assimilate the change in decision-making context—various factors, particularly environmental ones, affecting strategic decisions.
Various features of strategic decision making under adaptive approach are as follows:
i. Decision making is basically meant for problem solving, rather than going for new opportunities. Adaptation process is adopted to meet the threats by changed environment as against the decision making to meet the anticipated changes in environment which entrepreneurial approach suggests.
ii. Decisions are made in sequential, incremental steps, one thing at a time necessitated by environmental changes. The basic orientation is to maintain flexibility to adapt the decisions to more pressing needs.
iii. Various interest groups and stakeholders put considerable pressure on decision-making process so as to protect their own interests. Thus, the ultimate decision is a compromised one which may be, sometimes, at the cost of optimizing organizational effectiveness.
iv. Since decision making is incremental and fragmented, there is lack of integrative decision making. With the result, systems approach of decision making is missing.
In India, most of the public sector organizations follow adaptive approach in their decision making because of the power distribution between organizations’ management and controlling ministries of Government. Those organizations in the private sector which cannot anticipate likely future scenarios either based on vision and intuition or through formal and structured approach of environmental analysis follow this approach in their strategic decision-making process.
Suitability and Limitations:
Adaptive approach of strategic decision making is suitable for those organizations which tend to play the role of followers rather the role of leaders in the industry sector concerned. This approach saves them from high risk since the strategic decisions are based on the actual environmental factors. If these factors are less dynamic, this approach produces satisfactory results.
However, this approach suffers from one basic limitation. Environmental adaptation as a continuous process works well so long as there is continuity in environmental changes which can be assimilated quickly by the organizations adopting this approach.
When the environmental factors change fast, this approach does not work because by the time the organizations adopt one change which has some lead time, environment changes further making previous adaptation unworkable. In the present context of global competition, perhaps, this approach is not very suitable to achieve meaningful competitive advantage.
Approach # 4. Combination of Different Approaches:
We have seen above that various approaches of strategic decision making have their positive and negative aspects and each of these is suitable for particular type of organizations and the nature of environment. Since there are many variables which affect strategic decision making, many organizations follow a combination of different approaches. The experts on strategic management also hold this view.
For example, Sumantra Ghoshal, Professor of Strategic Leadership, comments that “it may be useful for Reliance (following entrepreneurial approach) to think whether it should follow a bit of Hindustan Unilever’s structured processes, just as much as it may be productive for Hindustan Unilever to consider ways of broadening its systems and culture to the entrepreneurial approach.”
In fact, Hindustan Unilever has realized the need for infusing entrepreneurial approach in developing business-level strategies. According to its former Chairman, Keki Dadiseth, “Hindustan Unilever has grown in size. While it has its own obvious benefits, it also brings some drawbacks. What we need to master is the art of creating and preserving the entrepreneurial ability and connectedness of a small company within a large company.” There may be different ways in which various approaches may be combined together.
More common ways are as follows:
i. Adaptive-entrepreneurial.
ii. Structured-adaptive.
iii. Entrepreneurial-structured.
iv. Adoption of different approaches for different businesses.
v. Adoption of different approaches at different stages of organizational life cycle.
While combining two or more approaches together, the individual organizations can do better. If they evaluate their culture, human resources, and leadership styles and the nature of environment in which an organization or its different businesses operate.
Approaches to Strategic Decision Making – Different Theories Suggested for Different Approaches
Different theories have suggested different approaches of decision-making.
These approaches are discussed hereunder:
(a) The Intuitive-Emotional Approach:
Decision-maker takes decisions based on intuition which is characterised by the use of hunches, inner feelings or the ‘gut-feeling’ of the decision-maker. Decision-maker who makes decisions based on intuition, practices management exclusively as an art. This decision-maker prefers habit or experience, relative thinking, and instincts using the unconscious cognitive process.
The decision-maker takes into account a number of alternatives into consideration, but simultaneously jumps one step in analysis and search for another and back again.
(b) The Rational-Analytical Approach:
In the rational-analytical approach, the decision-maker is intelligent and rational. The decision-maker makes the choice in full awareness of all available feasible alternatives to maximise advantages. The decision-maker considers all alternatives as well as consequences of all possible choices, orders these consequences in the light of a fixed scale of preferences, and chooses the alternative that procures the maximum gain.
The rational approval to decision-making includes the following steps:
(i) Recognize the need for a decision;
(ii) Establish, rank and weight criteria;
(iii) Gather available information and data;
(iv) Identify possible alternatives;
(v) Evaluate each alternative with respect to all the criteria; and
(vi) Select the best alternative.
(c) A Satisfying Approach:
There are limits to human rationality. Therefore, an individual must take decisions based on limited and incomplete knowledge. In view of this, the individual decision-maker cannot optimize but only satisfy.
Optimizing means choosing the best possible alternative. Satisfy means choosing the first alternative that meets the decision-makers minimum standard of satisfaction.
In the rational-analytical approach, the decision-maker is intelligent and rational. If the decision-maker is satisfied that an acceptable alternative has been found, it is selected otherwise, and the decision-maker searches for an additional alternative.
(d) Political-Behavioural Approach:
Normally, decisions made by organisations affect a variety of people and organisations. Hence, another view suggests that the corporations must consider all the people and organisations in making decisions. Corporations interact with a variety of stakeholders as the corporation and its stakeholders are mutually dependent on each other.
The employees exchange their human resources for fair salaries, benefits and harmonious industrial and human relations. Customers exchange their money for qualitative products and courteous services. Shareholders exchange their money for high rate of dividend and safety of their capital. Government provides security and protection and in turn expects payment of taxes regularly.
Financial institutions exchange their finance for high rate of interest, security of principal amount and regular payment of interest. Suppliers of inputs expect fair terms of trade and continuous business. Competitors exchange information through chamber of commerce, trade and industry for mutual existence and development.
The dealers expect continuous business. Thus, a stakeholder is an individual or organisation who can affect or is affected by the decision-making and achievement of organizational purpose and objective.
A Synthesis:
The decision-maker being a human being possesses a rational and the emotional mind. Environment is a mixture of analyzable and chaotic change and pressures. Therefore, decisions are made in a typically human way, using the rational, conscious analysis and intuitive, unconscious ‘gut feeling’ in light of political realities. Blending of these prescriptive and descriptive approaches helps to understand how decision-makers operate.
Approaches to Strategic Decision Making – Top 3 Theories of Strategic Decision Making Mostly Focused by Writers
Various theories have been suggested about how decisions are made. Let us examine these first. Most writers focus on three approaches – Intuitive-emotional, rational-analytical and behavioural- political.
1. Intuitive-Emotional:
The opposite of the rational decision maker is the intuitive decision maker. This decision maker prefers habit or experience, gut feeling, reflective thinking, and instinct, using the unconscious mental processes. Intuitive decision makers consider a number of alternatives and options, simultaneously jumping from one step in analysis or search to another and back again.
Some who prescribe intuition of judgement as the preferred approach point out that in many cases, judgment may lead to “better” decisions than “optimizing” techniques. For example, consider sensitivity analysis on a tool such as the economic order quantity. EOQ models suggest that there is an optimal order quantity considering trade-offs of ordering and holding costs.
Yet you can stray far from optimal in cost cases without a very significant impact on total cost differential. Here, then, judgement concerning other factors in the decision situation could lead to a better decision about order quantities, rather than holding fast to deciding what the rational model prescribes.
In fact, the timing of when to implement a decision based on the analysis may require an intuitive feel for what the dates are telling you. In many cases, judgement such as this might be preferred to relying on the analysis. Recognize, then, that analytical models are tools to help the decisions maker in improving judgement.
Those opposed to this approach argue that –
(a) The rational approach ensures that adequate attentions is given to consequences of decisions before big mistakes are made.
(b) It does not effectively use all the tools available to modern decision makers.
2. Rational-Analytical:
In this model, the decision maker is a unique actor whose behaviour is intelligent and rational. The decision is the choice this actor makes, in fall awareness of all available feasible alternatives, to maximize advantages. The decision maker therefore considers all the alternatives as well as the consequences of all the possible choice orders these consequences in the light of a fixed scale of preferences, and chooses the alternatives that procures the maximum gain.
This is the oldest decision theory. It prescribes a rational, conscious, systematic, and analytical approach. It has been criticized because –
(a) Decision makers make decisions with more than a maximization of objectives in mind. They tend to “satisfice,” that is, make a decision expected to yield a satisfactory, as opposed to an “optimal”, outcome. Besides, the objectives may change.
(b) The decision maker is often not a unique actor but part of a multiparty decision situation.
(c) Decision makers are not rational enough or informed enough to consider all alternatives or know all the consequences and information is costly.
3. Political-Behavioural:
A third model suggests that real decision makers must consider a variety of pressures from other people affected by their decisions. An organisation interacts with a variety of shareholders in series of interdependent exchange relationships. Unions exchange labour for decent wages and job security.
Customers exchange money for products and services. Owners exchange capital for expected returns on investment. Suppliers exchange inputs for money and continued business. Government exchanges protection and economic security for taxes. Even competitors exchange information with one another through trade associations or other contacts. The list of agents and expectation goes on.
Each shareholder gives the organisation something and expects something in return. To the extent an organisation has favourable exchange relationship gets a bit more than given compared with other organization and stockholders, it has more power. More powerful stockholders have more influence over decisions because the organisation is more dependent on these stockholders.
A majority stockholder can have a greater influence on decisions about reinvestment versus dividend payout than if stock is widely held by many small owners. If the firm is labour intensive more attention may be paid to union-leaders demands for better wages than to the desires of stockholders for more profit, because the union might shut the firm down. Given these realities, decision makers do a juggling act to meet the demands of the various stockholders. Through political compromise they attempt to merge competing demands so that a coalition of interests emerges that will support the decision.
The mode of decision making is descriptive theory suggesting that the organisation in which the decision maker works limits the choices available. Decisions are made when the several people involved in the process agree that they have found a solution. They do this in mutual adjustment and negotiation following the rules of the game the way decisions have been made in the organisation in the past. The decision maker must consider whether the decision can be implemented politically.
Approaches of Strategic Decision Making – 5 Important Approaches of Strategic Decision Making Categorised by Few Authors
Strategic decision making process is complex and intriguing. Various researchers and authors have studied and described the manner in which such decision-making takes place. These different approaches have also been categorised by a few authors.
We have attempted to understand the different approaches to strategic decision making as under:
Approach # 1. Intuitive-Anticipatory:
This approach is based on the intuition of, usually, a single person who is the promoter or chief executive of an organisation. He anticipates the future and takes strategic decisions accordingly. The process is implicit in the sense that the mental processes involved in decision-making are not readily evident.
The basis of decision-making is intuition, judgement or hunch, which are the result of long years of experience in dealing with a variety of strategic problems. A few authors, including Herbert Simon, Rechard Cyert, James March and Henry Mintzberg have contributed to an understanding of this approach. It is difficult to provide an illustration of this approach. Owing to its inherent nature, the process of decision-making adopted under this approach is not clear and inexplicable and, therefore, cannot be reported.
Approach # 2. Formal-Structured:
This approach involves systematic planning and set procedures. Since it is formal and structured, strategic problems are dealt with by a designated group of planners who follow a set procedure to arrive at decisions. Different types of planning system such as strategic planning, corporate planning or long-range planning are used.
Most authors in strategic management use the formal-structured approach framework in their texts. As an illustration, we may consider the example of Larsen & Toubro (L & T), which adopts a formal strategic planning system. In essence, the company follows a three-stage process.
The first stage is the diagnostic phase involving the setting of corporate mission, objectives and goals, and SWOT (strengths, weaknesses, opportunities and threats) analysis by each of the seven business group in the company. The second stage deals with providing directions through the choice of alternatives strategies to be adopted. The last phase is the implementation phase where the action plan is put into action.
Approach # 3. Adaptive:
The essence of the adaptive approach is on taking strategic decisions on the basis of how a change is perceived at a given point of time. With changing circumstances, the decisions are also reviewed. The basic for review of decisions is an estimation of the gap between the current position of the company and its objectives.
Strategic decisions are meant to reduce such a gap. Circumstances are defined in terms of the environment. For an environment that is perceived to be stable, strategic decision are based on certainty. Where stability is less, and the future is risky, contingency planning systems are adopted. In an uncertain environment, the emphasis is on building up adaptive capability to respond to changes as and when they occur. This approach has been dealt with by authors like H. Igor Ansoff and Russell L. Ackoff. Many organisations exhibit the adoption of such an approach in the Indian business environment.
Mintzberg’s classification of the modes of strategy making as entrepreneurial, adaptive, and planning, offers another theoretical framework which aids the understanding of the strategic decision-making process.
According to Mintzberg, three pure modes of strategy making could be defined. The entrepreneurial mode envisages an active search for opportunities by a person, usually the entrepreneur or chief executive, who takes bold and risky decisions and rapidly moves the organisation towards its objectives.
In the adaptive mode, the emphasis is on solving short-term problems by adopting a reactive attitude and decisions are made in incremental steps based on negotiated settlements among different interest groups. The planning involves a systematic appraisal of the environment, assessment of internal capability and choosing courses of action in the form of meticulously formulated strategies.
These three pure modes could be combined to form mixed modes like adaptive-entrepreneurial, adaptive-planning or entrepreneurial-planning modes. The method of strategy making may also differ with respect to different functional areas. Organisations may also adopt different modes at successive stages of their development.
Thus, there could be many different approaches to strategic decision-making. But to state that an organisation follows only a single approach at a time or only one approach all the time would be unrealistic. Real-life business situations offer countless examples of organisations and decision makers who adopt a combination of approaches.
Approach # 4. Incremental:
The incremental or, colloquially, the muddling through approach involves limiting the focus of strategic decision-making to a few alternatives at a time that differ only marginally from one another. The choice of the best alternative is based on an iterative process of continually redefining problems so as to make them manageable.
The end result is a negotiated settlement between different interest groups. Charles Lindblom has explained this approach through the concept of disjointed incrementalism. Most public sector companies in India, in their strategic decision-making, exhibit the adoption of an incremental approach. Owing to the various pulls and pressures between which public sector companies typically operate with regard to their objectives and goals, the strategic decision-making is based on negotiated settlement among different groups.
Approach # 5. Entrepreneurial-Opportunistic:
This approach is characterised by a constant search for opportunities and exploiting them for the benefit of the organisation. Entrepreneurial strategic decision-making is based on the perception of opportunities, diagnosing them for the generation of alternatives, analysing the consequences and selecting the course of action that would best meet the objectives. Such an approach is generally adopted by entrepreneurs and family- business executives but may also be adopted by manager in organisations.
Many examples can be provided in the Indian context where this approach is adopted for strategic decision-making. The illustration of Dhirubhai Ambani, the founder-chairman of the Reliance group of companies, typifies the adoption of the entrepreneurial-opportunistic approach.
Starting as a humble office member of staff in Burmah Shall, Ambani moved into spices exports and then to nylon yarn trading. It is in this business that he, in the early sixties, realised the importance of synthetic fabrics. Seizing upon the opportunity, Ambani laid the foundation of Reliance Textiles Ltd., a giant multi-product and multi-location company.