Excerpt
Introduction
The fact that strategic decisions have an essential impact on growth, as well as on profitability, illustrates that organisations should become familiarised with the different approaches to come to a strategic decision (Wirtz et al, 2007). “Every success, every mishap, every opportunity seized or missed is the result of a decision that someone made or failed to made” (Rogers and Marcia, 2006, para 1). This sentence emphasises the importance of strategic decisions and can be transferred to the business of every organisation.
Researchers discuss, whether strategic planning tools should be used and which risk they bare and debate about the degree of formalization. Should decisions rely more on facts or more on human intuition and what benefits come along? While there are several discussable approaches, it is widely agreed that strategic decisions influence the long-term performance of the company, by focusing on the future of the business as a whole, rather than on specific business units (Wilson, 1998).
While Mintzberg (1998) concluded, that there is no universally established definition of strategy, Porter (1996, p. 68) defines the real intention of strategy as “the creation of a unique and valuable position, involving a different set of activities”.
A glance at the practice shows that companies use several different approaches to come to strategic decisions. Performance indicators proof that some organisations established a very successful way of decision making, contrarily other companies are struggling to find a way to make strategic decisions which fit to the business model and the industry they are acting in.
This essay illustrates which approach is effective in making strategic decisions in today's world, with the emphasis to create an entrepreneurial environment. To analyse different approaches, this essay first reviews the literature in order to provide an overview of the theory about strategic development processes, continuing with benefits and dilemmas of deliberate and emergent strategies, illustrating that the incremental approach possesses balanced features. Finally, the essay discusses practical approaches of how to make effective strategic decisions in a high-velocity environment.
Literature review
The theories concerning strategic decision making in an organisational context can be divided into two predominant views (Mintzberg, 1973; Wilson, 1998). The traditional view implies that strategic success is mainly driven by careful analysis and long-term planning (Ansoff, 1980; Porter, 1980). According to the theory, the clear formulation of long-term goals leads to clearer and commonly recognised objectives for the company as a whole and positively affects the motivation of employees by creating a vision. Moreover, deliberate theories are commonly associated with the intention to base decisions on rationality and objectivity, minimizing the human sense of upcoming trends (Wilson, 1998). Mintzberg (1985) defines three preconditions, which have to be satisfied for a perfectly deliberate strategy. Primarily, before any intentions are taken into action, they must be articulated in a precise and detailed way. To ensure that these intentions are organisational and not personal, they must be common to all actors. And finally, the collective intention must be realised as intended, meaning that there have to be no external factors, which could interfere the collective intentions. Especially due to the final condition, it is unlikely to find an organisation in the real economy, which fulfils the conditions of a perfectly deliberate strategy.
Traditional approaches are often criticised to be too bureaucratic and inflexible to react to changes in the market, which leads to poor strategic decisions of the management (Gluck, 1984). According to Mintzberg (1994) one of the fallacies of strategic planning is the assumption that the environment can be predicted. Further, Mintzberg emphasises that formal strategic planning eliminates creativity and critical thinking, by assuming that the systems are doing better than the humans. Ansoff (1988, p. 196) admitted, that his former rational approach could cause “paralysis by analysis”, pointing out that he underestimated the importance of creative thinking. Frederickson and Mitchell (1984) proved that rationality has a negative impact on the company’s performance in a high velocity environment.
Accordingly, Mintzberg (1973) argues, that due to a higher degree of uncertainty, the success of a company has become more dependent on the reaction to short-term factors. Supporters of this theory are arguing, that an emergent and more flexible approach, where strategies can be adapted continuously, are meeting the requirements of an increasingly volatile environment in a more effective way than the traditional approach (Mintzberg, 1973; Grant, 2003; Quinn, 1978). Quinn (1978) describes the incremental approach as a “learning-by-doing” procedure, which does not solely rely one human intuition but also on quantitative analyses and can therefore be described as a relatively deliberate approach.
While Courtney et al. (1997, p. 68) has a very radical view about the traditional approaches, arguing that “under uncertainty, traditional approaches to strategic planning can be downright dangerous“, the majority of theories about decision making in a high-velocity environment suggest a reorientation and an extension of the traditional approaches to greater flexibility, concluding that both, intensive analysis and more flexible instinctive reactions are essential for successful decision making (drawn from: Mintzberg 1994; Volberda, 1996; Wilson 1998).
Decision making in a high-velocity environment
Most authors argue, that a global political climate, the deregulation of markets, advanced technologies and the continuously increasing globalisation has created a more volatile economic environment and therefore developed new approaches based on their critics (Wirtz 2007; Chakravarthy 1997). Accordingly, supporters argue that more volatile markets lead to shorter planning horizons, higher level of competition and discontinuous changes of demand (drawn from: Grant 2003; Wirtz 2009; Volberda 1996).
Due to the fact, that most authors articulate the view that there is a shift towards more volatile markets, several theories about how to handle successful strategic decision making in a volatile economy have been developed.
While some authors give a rough idea about general values and managing philosophies (Chakravarthy, 1997; Grant, 2003) others introduce detailed step-by- step approaches on how to handle specific situations in a highly volatile business world (Kaplan and Beinhocker; Courtney et al, 1997).
Independent of external circumstances, such as the velocity of the market, companies have a certain need for innovative, entrepreneurial ideas. Obviously, some organisations are more successful in creating a culture that supports such an entrepreneurial environment than others.
Less bureaucracy, flat hierarchies and a certain degree of informality, combined with an entrepreneurial philosophy are essentials to an environment where opportunities flow at a higher pace (Okhuysen and Eisenhardt, 2002). Mintzberg (1994) supports the view that new perspectives and combinations, as well as informal learning should be encouraged.
An effective strategy as well as a successful decision making process is essential to compete in the market. Strategic decision making, which is the act of taking a final decision after the consideration of other options, have to be successful in order to launch innovations in an optimal way. Therefore, external circumstances like the velocity of the market, increasing complexity, ambiguity, and unpredictability of the economy have a large impact and should be considered during the decision making process (Davis et al, 2009).
Contrasting deliberate and emergent strategy in high-velocity environments Researchers disagree about whether an emergent or an intended strategy should be applied to keep up with the market’s pace. An essential core point in this dispute is whether external factors, which influence the organisation, are predictable. According to Mintzberg (1994) basic patterns may be predictable, but discontinuities, such as upcoming innovations, are not. Courtney et al (1997), a McKinsey consultant, developed a four-dimension model, which is useful in an uncertain business environment. The four-dimension model proposes that even in an uncertain environment it is possible to identify trends to a certain degree. The model is merely trying to minimise the degree of uncertainty, but is aware of the fact that it cannot be eliminated completely. Quinn (1978) points out, that in order to adapt the strategy incrementally, a constant and continuous scanning of the environment is important in a high velocity environment, meaning that data needs to be updated regularly. Courtney's model is an effective tool for strategic decision making and can be clustered as a formal planning tool, adapted into a volatile environment.
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