ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Strategic Management - Decisions, inertia, applications I

Updated on October 3, 2015
Source

1. Strategic decisions and their implementation

1.1. Strategic decisions

Strategic decision making is enormously significant and a source of failures as long it is difficult for humans to make a decision under circumstances which are not clear (uncertainty). It is challenging to estimate the outcome of a project or the consequences of a tactical decision. From a financial point of view it might be easy on the first glance. Take the project with the biggest prospect return, with the highest expected net present value. But it is more. No formula can predict future cash flows certainly. However, when it comes to decisions under uncertainty errors occur. These errors could lead to fatal consequences for a company. Also choices are not always rational and benefit maximizing. Sources of errors are emotions, limited computing performance and a lot of biases, heuristics and behavioral anomalies.

Beginning from the scratch the probably most important strategic decision is about what kind of business model do we chose. Then executing this strategy it is probably an irreversible process. There is no way back. This is why it is also the most commitment-intensive decision. The general manager and his employees, they all work for the same goal into the same direction. That’s why it is also an organization-wide decision.

1.2. Decision making errors and remedies

Nevertheless, decisions are not always absolutely rational. This is what Kahneman and Tversky tried to explain with their Prospect Theory. In a nutshell people’s risk preferences change under uncertainty. An equal to the benefits fraction of loss is perceived more emotionally than the benefit. People “suffer” more when it is about losing. This is way they are willing to take more risk compared to zone of benefit. Kahneman and Tversky also tried to explain typical systematic errors in decision making, so called biases and heuristics. In general these bias and heuristics are nothing bad. People can make a decision in a small amount of time without much effort. Sometimes it would take too long to compute the marginal benefit of each option.(Kahneman and Tversky, 1979; Tversky and Kahneman, 1992)

Value function under Prospect Theory
Value function under Prospect Theory | Source

Some common problems in decision making (Russo & Schoemaker 1989):

1. Plunging in: We start ambitiously without thinking before. We invest much time and energy in doing something. But we didn't think hard enough about it before. Why do I do this?

2. Frame ignorance: We are all framed. No one is absolutely objective. Heuristics like mental accounting or simplifications determine our thinking significantly. We are framing the big picture by ourselves, others or circumstances. Obviously this picture doesn't contain all possible aspects of a complex problem.

3. Frame uncontrolled: But for solving problems a certain frame can be helpful. We sometimes don't define this frame consciously.

4. Overconfidence: We overestimate our own abilities, especially when we were successful so far. By doing so our assumptions must be right.

5. Short sight: Convenient information are perceived as reliable information. We follow the rule of the thumb.

6. Intuitive decisions: Often we “shoot from the hip”. Without processing all available information, decisions are based on a small fraction of perceived information.

7. Group failures: Group dynamics sometimes tend to ignore “minor” critical thoughts.

8. Evaluation errors: We interpret the results wrong to protect our ego. No on likes to admit mistakes. We don't keep track of our decisions and their results, which makes analyzing and learning from it quite difficult.

9. No audit: We don't try to understand our decision making process to avoid systematic errors.

Make better decisions

Source

How to circumvent those problems to make better decisions?

Russo and Schoemaker recommend:

1. Frame: Structure and define the problem

2. Gather intelligence: Look for information and derive reasonable estimations.

3. Conclude: Based on frame and intelligence.

4. Learn: Learn from your results. Keep track of them. Don't protect your ego. Recognize your mistakes. Make it better.

As a way to avoid systematic errors Kahneman recommends using checklists in business decisions (Kahneman, 2012). Checklists could be used in all parts of an organization. A lot of big companies are using them to improve the internal efficiency and also to avoid mistakes. Another way is strategic planning. Write things down. Think hard and never underestimate a situation and its variables.

But there is a difference between making errors on an individual and an organizational level. On an organizational level the impact of an error increases - figuratively speaking - potentially with the number of executors or the amount of money invested. Despite to this intensity there might be no one who notices this error. In a group all do the same and orientate themselves at the group (herding behavior). This way we avoid responsibility and the “stress” and effort of thinking (Zhu, 2009). The most fatal consequence is the fall of the company.

1.3. Strategy implementation

Implementing a strategy is difficult. There are some obstacles to cope with especially with the people’s dimension – natural inertias.

As long there are more than one person involved, the other persons need to be convinced from the new strategy or should at least do what they were asked for. People don’t like changes. They want to keep everything as it is (status quo bias). So to implement new ideas in a company they have to be implemented in people’s heads first.

In the movie “Moneyball” team leader Bean (Brad Pitt) wanted to make his team win. But he didn’t get the budget to buy players, which were considered as good. Inspired by a student of economics he bought undervalued players. Combined in a team the probability of win was higher. Good idea. But Beans fellows didn’t understand this system and were absolutely against it (at the beginning)(Miller, 2011). If Bean had listen to them, they’d have won the game never.

And what comes first? Strategy or structure? There are different point of views. Porter said strategy comes first. Deducting from this we have to come to the structure. But structural changes – also when they are for a higher goal – are usually not welcome (change resistance). There are different interests. People with power want to keep their power. And they don’t give it up without fighting. Also people don’t like changes at all. It is so much more comfy if nothing changes. In “Moneyball” the fellows said: we always did it this way (Miller, 2011) (administrative heritage). But why should the new way be correct? They don’t think about. They prefer a no-change-policy. To establish changes on an organizational level it takes time and a lot of strength from the general manager. Until a new corporate culture is born there will be decreasing resistance.

Combining strategic goals with financial budgets

Source

Another obstacle which makes strategy implementation difficult are different temporal dimensions of thinking. While some strategic goals (e.g. milestones) are part of a short-run point of view, financial plans usually come with a long-run point of view. Beinhocker and Kaplan figured out “that in-depth discussions of strategy take time. Calendar-challenged executives may chafe, but most CEOs we interviewed claimed that they want to spend about a third of their time on strategy. That amounts to 80 days in a 240-working-day year. Against that backdrop, it doesn't seem unreasonable to spend 20 to 30 days (that is, 15 to 25 days for business units, plus 2 to 5 days for sector and corporate strategy) in intensive, well-prepared discussions of strategy.”(Beinhocker and Kaplan, 2002)


Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)