Strategic Planning and Decision Comprehensiveness

Table of Contents

1. Introduction
1.1 Aim of the Thesis
1.2 Methodology
1.3 Structure of the Thesis

2. Basics
2.1 Definition of Strategic Planning
2.2 Definition of Decision Comprehensiveness
2.3 Determining Factors
2.3.1 Environmental Factors
Environmental Uncertainty
Environmental Change
Environmental Complexity
Technology Uncertainty
Demand Uncertainty
Munificence
Competitor Activities
Home Country
2.3.2 Organizational Factors
Top Management Team Characteristics
Internal Power Structure
Organization Age
Firm Size
2.3.3 Decision Specific Factors
Decision Complexity
Time Horizon
2.4 Introduction of the Papers

3. Analysis of the Factors
3.1 Environmental Factors
Environmental Uncertainty
Environmental Change
Environmental Complexity
Technology Uncertainty
Demand Uncertainty
Munificence
Competitor Activities
Home country
3.2 Organizational Factors
Top Management Team Characteristics
Internal Power Structure
Organization Age
Firm Size
3.3 Decision Specific Factors
Decision Complexity
Time Horizon

4. Discussion and Conclusions

5. Limitations

Table of Figures

Figure 1 – Overview of the literature

Figure 2 – Efficacy of strategic planning and decision comprehensiveness

Table of Abbreviations

illustration not visible in this excerpt

1. Introduction

This Bachelor thesis gives an overview of the existing literature of strategic planning and decision comprehensiveness.

Strategic decisions belong to the day-to-day work within an organization. Admittedly, they are complex constructs that consist of many different factors that influence strategic planning as well as the required comprehensiveness of the decision making process (Carmeli, Sheaffer & Halevi, 2009: 698).

The use of strategic planning as a tool to overcome this complexity has increased within the last years in large firms as well as in small ones (Glaister, Dincer, Tatoglu, Demirbag, and Zaim (2008: 372). To date, strategic planning is the most frequently used tool in companies, small and large ones, striving to reach the most effective allocation of resources (Aldehayyat & Khattab, 2013: 13). Nonetheless, there is a dispute between former researchers about the construct of strategic planning (Boyd & Reuning-Elliott, 1998: 182).

Although decision comprehensiveness is meanwhile seen as a crucial part in strategic decision making, its efficacy still seems to be elusive (Atuahene-Gima & Li, 2004: 583).

Today’s business world is characterized by high-velocity changes and high competition (Brews & Purohit, 2007: 64). Product life-cycles have become shorter, technology change has accelerated, customer’s demands are more complicated, and competition is higher. This increases uncertainties thus creating new challenges and requirements for companies in their decision making process. Coping with these new challenges becomes pivotal for a firm’s survival (cf. Brews & Purohit, 2007: 64 f.).

A main task of managers is to pick the relevant information out of a vast amount of information available (Forbes, 2007: 370). Strategic management research puts high meaning on the competitive environment of an organization. In that context, companies are viewed as information-processing constructs and interpretation systems (Forbes, 2007: 370). The fit between the scope of information-processing required and what a firm really puts into action is decisive for a firm’s performance and long-term success (cf. Atuahene-Gima & Li, 2004: 583). The scope of decision comprehensiveness required beyond that depends on the setting the organization is acting in (Fredrickson: 1984: 447).

Ostensibly, it is necessary to explore this body of knowledge further and to analyze which factors are really crucial to maximize a firm’s outcome.

Although strategic planning and decision comprehensiveness both are essential elements for a company’s long-term success, little is known about their properties (Fredrickson & Mitchell, 1984: 402). Moreover, serious research problems and the absence of generalizability diminish the informational value of the findings (Boyd and Reuning-Elliott, 1998: 181; Forbes, 2007: 361). Hence, further research to provide more explicit understanding of the different factors that determine the efficacy of decision comprehensiveness in strategic planning is necessary (Forbes, 2007: 373).

Existing literature generally classifies the strategic decision making process into two models: the synoptic and the incremental model (Atuahene-Gima & Li, 2004: 584; Fredrickson, 1984: 445 ff.; Jones, Jacobs & VonRiesen, 1991: 40 ff.). The synoptic model is the most accepted model in literature and is supposed to be a rational and active process (Fredrickson & Mitchell, 1984: 401). Within that model, decision makers are supposed to solve current problems and to consider future developments. Decision Comprehensiveness is an inherent and pivotal part of the decision making process in the synoptic model (cf. Fredrickson & Mitchell, 1984: 401). The incremental model, on the other hand, is perceived to be a less comprehensive approach with fewer alternatives considered as a reaction to the current situation (Atuahene-Gima & Li, 2004: 584). It describes decision making as a response to current changes in the environment; it is characterized as an adaptive process (Fredrickson & Mitchell, 1984: 401). What is behind that model is the thought that there is no planning process that can consider all vital variables.

1.1 Aim of the Thesis

The thesis strives to advance existing literature by presenting the results of former researchers and scrutinize the findings in order to provide a better explanation of the relationship between strategic planning and decision comprehensiveness and decision quality. The thesis further seeks to provide a better understanding of the influence of strategic planning and decision comprehensiveness on decision quality and to overcome the existing inconclusiveness inherent in this field of research. The thesis attempts to contribute greater clarity of how managers apply strategic planning and decision comprehensiveness in order to gain the highest decision quality achievable.

Taken together, this thesis is about providing a richer and more complex understanding of using strategic planning and decision comprehensiveness in the most profitable way.

1.2 Methodology

The selection of the papers has been conducted in two different ways. The first one, the direct search, was the scanning of different databases like JSTOR, EBSCO, and Google Scholar for the terms “strategic planning” and “decision comprehensiveness”. To guarantee that the papers that have been used are reliable and of high quality the publisher served as an indicator. All the papers have been released in widely acknowledged journals.

The second way to gather studies of high quality was to take papers and/or researchers into account, that have been cited and referred to very frequently, and thus seemed to be appreciated by scientist of that array of knowledge.

To gain broader knowledge of the correlation between strategic planning and decision comprehensiveness and a company’s performance the results from the different studies have been accumulated, analyzed and interpreted in order to result in a more extensive elucidation of the problem. For former researchers have examined different parts of this problem but ignored other important factors, the different findings have been combined to create a wider understanding of these processes and their effects on the different components of a firm’s performance.

To gain an all-encompassing and more general view of strategic planning and decision comprehensiveness, it was reassured that the chosen literature consists of studies conducted in firms of different size, industry sectors, and geographical regions.

1.3 Structure of the Thesis

First of all, the basics are explicated. Therefore the terms ‘strategic planning’ and ‘decision comprehensiveness’ are defined and explained in more detail. Afterwards the different factors that are supposed to be decisive for strategic planning and decision comprehensiveness are defined. In a next step, the papers the thesis is based on will be introduced in general, and the results are summarized and compared. This is followed by the main part of the thesis, where the influences of the different factors are analyzed. Afterwards the conclusions are summarized and discussed, implications for practices are derived. Closing, the limitations the thesis suffers from have been identified.

2. Basics

In this abstract the basics of the following thesis will be depicted. First of all, a broad definition of strategic planning and decision comprehensiveness is given. Afterwards, the influencing factors are introduced.

2.1 Definition of Strategic Planning

Strategic planning has its origin in the 1960s in the manufacturing firms of the United States (Boyd, 1991: 353). Over the years it has found more and more approval and today strategic planning is applied by almost every company (Robinson & Pearce, 1984: 135). The very basic goal of strategic planning is to anticipate future situations and thereby create responses to prospective opportunities and threats (Ugboro, Obeng & Spann, 2011: 111). Strategic planning therewith gives direction to a company’s’ actions (Das, 1991: 50).

Former researchers have defined strategic planning as the process of defining the company’s long-term goals and objectives for the future and to determine and implement a course of action to reach them (Mintzberg, 1978: 935). During this process all relevant variables that influence an organizations performance have to be embraced in the strategic planning process (Ugboro, Obeng & Spann, 2011: 89).

Mintzberg (1978: 943) claims that strategic planning is not a continuous process but rather erratic. This is because unforeseen changes in the environment emerge and require reactions. Strategic planning leads to a more exhaustive building of alternatives and by that to a better reaction in case of contingency (Gica, Pop & Boca, 2009: 140).

At its core, strategic planning is about scanning the organization’s environment in order to identify threats and opportunities that evolve in the future (Gica, Pop & Boca, 2009: 140). The strategic planning process therefore builds a foundation for firms to make decisions in order to exploit future developments in the best possible way. Strategic planning contributes to the strategic decision making process because it enriches the field of vision and thus leads to the creation of more alternatives. It is supposed to make it easier for companies to react to changes in the environment (cf. Gica, Pop & Boca, 2009: 140).

In defining formal strategic planning, Armstrong (1982: 1 ff.) refers to a concrete process of four steps: specify objectives, generate strategies, evaluate strategies, and monitor results. The first step of specifying the objectives is important, because many different objectives are involved in the strategic planning process and therefore have to be identified. The second step of generating strategies is about developing alternative strategies to assure the alignment with the enivornment. These different strategies have to be assed in a further step to ensure that they first are within the constrictions and second are aligned with the specified objectives. In the last step of strategic planning then should the results should then be observed in order to provide feedback concerning the different objectives (cf. Armstrong, 1982: 1 ff.).

To sum it all up, the overall goal of strategic planning is to improve decision quality, thereby outperforming other companies (Boyd, 1991: 353). Reviewing this definition of strategic planning, it seems that a company that invests in strategic planning should be rewarded with a better decision quality.

2.2 Definition of Decision Comprehensiveness

Rooted in the synoptic model of strategic decision making, decision comprehensiveness is a multifarious construct. Decision comprehensiveness consists of different characteristics, including the examination of the environment, evaluating threats and opportunities, and creating different alternatives of action (Fredrickson & Mitchell, 1984: 402). Decision comprehensiveness is an inherent part of rational strategic decision making (Fredrickson & Mitchell, 1984: 419).

Fredrickson and Mitchell (1984: 399) define decision comprehensiveness as “the extent to which organizations attempt to be exhaustive in making and integrating strategic decisions”. Definitions of later researchers (Atuahene-Gima & Li, 2004: 583 ff.; Elbanna, 2007: 227 ff.; Forbes, 2007: 361 ff.; Miller, 2008: 598 ff.; Wood & LaForge, 1979: 516 ff.) are based on that definition and therefore it will also be used in this thesis.

It is generally believed that decision comprehensiveness increases decision quality because decision makers analyze their external environment and their internal resources, which provides valuable information for decision makers (Atuahene-Gima & Li, 2004: 584). Firms that are more comprehensive in their strategic decision making process have more information they can exploit (Forbes, 2007: 362). A company that puts high effort into scanning customers’ preferences, for instance, is better prepared for changes in demand (Atuahene-Gima & Li, 2004: 586). In addition, decision comprehensiveness fosters commitment to the implementation of the chosen strategy (Miller, 2008: 614). Fredrickson and Mitchell (1984: 399 ff.) and Fredrickson (1984: 445 ff.), however, found that decision comprehensiveness increases the organization’s performance in environments where uncertainty is low, but even harms firm performance in unstable environments. They argue that decision comprehensiveness makes the decision making process more complex and therefore requires much time. In environments where uncertainty is high it is still necessary to be able to react quickly and therefore an incremental decision making process seems to be more appropriate (Fredrickson & Mitchel, 1984: 405).

In contrast, some other studies have found evidence for the total opposite, that decision comprehensiveness fosters decision quality in environments with high uncertainty. Bourgeois and Eisenhardt (1988: 816 ff.), for example, found that decision effectiveness is higher when decision comprehensiveness is higher in high-velocity environments. The issue of how comprehensive a strategic planning process has to be in unstable environments creates a gap between former researchers of decision comprehensiveness.

2.3 Determining Factors

The factors that determine the efficacy of strategic planning and decision comprehensiveness are compartmentalized into three categories: the environmental factors that frame the external factors, the organizational factors, which are the internal factors, and the decision specific factors which vary from decision to decision.

2.3.1 Environmental Factors

An organization is by nature interwoven with its environment (Anderson & Tushman, 2001. 676). Business environments today are characterized by high-velocity changes and high uncertainties in demand and technology (Brews & Purohit, 2007: 64). Moreover, environments are sources of information that companies have to analyze and to exploit for strategic decision making (Anderson & Tushman, 2001: 682).

For the main goal of strategic planning is to provide the best fit between an organization and its environment (Bantel, 1993: 441), environmental factors are pivotal and have to be embraced in the strategic planning process (Yasai-Ardekani & Haug, 1997: 730 f.). An organization’s environment represents the surrounding it is acting in and, beyond that, is a grave source of uncertainty (Anderson & Tushman, 2001: 682). Former researchers concentrating on the factors of the organization’s environment thence have mainly focused on uncertainty. To name here are for example the very frequently cited studies by Bourgeois and Eisenhardt (1988: 816 ff.), Fredrickson and Mitchell (1984: 399 ff.), Fredrickson (1984: 445 ff.), and Mintzberg (1978: 934 ff.). Former researchers, however, have not paid enough attention to the different environmental elements that influence the strategic decision making process (Atuahene-Gima & Li, 2004: 591).

The environment is a multidimensional construct consisting of several factors with different demands on strategic planning and decision comprehensiveness (Atuahene-Gima & Li, 2004: 585). Thus these factors have to be scrutinized separately.

Every decision that is made within a company is based on assumptions about future environmental developments. The success in turn depends on the fit of strategic decision with real environmental changes. Environmental factors therefore build a crucial part in the strategic decision making process. Former researchers have taken the environment as a one-dimensional construct, which is not adequate (Atuahene-Gima & Li, 2004: 585). This therefore abstract gives an overview of and examines the different factors in an organization’s environment that influence strategic decision making to bring light into the confusing findings explicated above.

Environmental Uncertainty

Handling environmental uncertainty belongs to the core tasks of a manger (Anderson & Tushman, 2001: 682). It is defined as the inaptness of the decision maker of making predictions of the future, given that the information he can access is limited (Anderson & Tushman, 2001: 682). Uncertainty in the environment is detrimental for firms, because it bears the risk of misinterpretations (Bourgeois & Eisenhardt, 1988: 817). Fredrickson and Mitchell (1984: 404) further identified environmental uncertainty as a threat to rational decision making. It hinders managers’ attempts to align their strategies with the environment.

In uncertain environments it is even more important that decisions are of high quality, because once left behind it is maybe not possible for a firm to catch up with the competition again (Bourgeois & Eisenhardt, 1988: 833).

Environmental Uncertainties are the most influencing factors for a company’s performance (Anderson & Tushman, 2001: 675) and therefore require more exhaustive strategic planning as well as decision comprehensiveness. When planning strategically, companies seek to reduce environmental uncertainty because uncertainty threatens rationality in the decision making process (Fredrickson & Mitchell, 1984: 404). Fredrickson and Mitchell (1984: 404) further argue that problems for rational decision making arise if crucial parameters are not palpable or identifiable. Therefore, environmental stability is the perceived as the most ominous factor in the strategic decision processes.

Anderson and Tushman (2001: 683) assert that uncertainty is harmful for organizations because of sundry reasons. First, firms make investments based on their assumption of how the environment will develop. This possibly results in sunk costs. If uncertainty is high, this means higher risks about the outcome. Risk-averse managers may ignore opportunities that are provided. Secondly, in environments with high uncertainty, outcomes are always based on luck, which means that success is not only based on good strategic decision making but is also fragile. In addition to that, it may be not possible for firms to learn from their experience for the same situation does not appear twice. The third jeopardy refers to the internal power structure. If environmental uncertainty is high, the propensity of internal political turbulences is higher and political struggles are more likely to occur. This, in turn, leads to less attention spent on the objectives of the strategic decision making process (cf. Anderson & Tushman, 2001: 683 f.). Thus, it is inevitable for a firm to overcome these uncertainties.

Some researchers distinguish between uncertainty, where the probability of the outcome in the environment is known, and ambiguity, where are no probabilities known (Forbes, 2007: 367). For this differentiation is only made by few researchers and only emerges in one study here (Forbes, 2007: 361 ff.), this thesis does not follow this differentiation and consolidates these two approaches under environmental uncertainty.

Environmental Change

Environmental change refers to the speed of change of the environments (Bourgeois & Eisenhardt, 1988: 816). Some researchers (Fredrickson & Mitchel, 1984: 445 ff.; Fredrickson, 1984: 399; Miller, 2008: 589 ff.) use the term ‘environmental stability’ instead. These two terms serve as synonyms here.

Stable environments appear to provide ideal conditions for a comprehensive strategic planning process (Miller, 2008: 599). While former researchers mostly agree that decision comprehensiveness has positive influence on decision quality in stable environments, there is large dispute about its efficacy in unstable environment. For example, Fredrickson and Mitchell (1984: 404 f.) argue, in stable environments parameters crucial for the strategic decision making process are more likely to be identified and investigated while in unstable ones it is much more difficult to achieved the aspired level of certainty.

Environmental Complexity

Environmental complexity refers to the quantity of components and their interrelations (Rajagopalan, Rasheed & Datta, 1993: 358). Complex environments are characterized by high uncertainty and highly complicated structures (Kukalis, 1989, 567). Kukalis (1989: 567) therefore claims that in highly complex environments strategic planning has to be more comprehensive.

Technology Uncertainty

Atuahene-Gima and Li (2004: 583) define technology uncertainty as the perceived pace of technological change and the associated predictability. Inherent parts of technology uncertainty are short product cycles and fast technology obsolescence (Atuahene-Gima & Li, 2004: 583). Following, technology uncertainty is a result of innovation (Anderson & Tushman, 2001: 685).

Technology uncertainty is highest when an obsolete technology is replaced by a new one, because at that time it is not apparent which variant will become industry standard (Anderson & Tushman, 2001: 678). If an industry standard changes, it is difficult for established organizations that are aligned with these standards to adopt with this change. The main problem here lies within the alignment of the internal policy with the new technology (cf. Anderson & Tushman, 2001: 678).

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