What makes strategic decisions different?

‘What makes strategic decisions different’ by Phil Rosenweig, Harvard Business Review, November 2013

There are the second of two interesting articles on strategic decision making in this edition of Harvard Business Review.  The author of this article is a professor of strategy at the Swiss Business School IMD and he starts the article by making two complaints.  First that advances in understanding of business decisions have not resulted in improvements in practice (or, knowing the way business school professors think, that no-one has been listening to what he says!).  Second he argues that most research goes into simple quantifiable decisions without sufficient emphasis on the more challenging long term strategic judgments.

He even suggests that the use of the word ‘decision’ can be misleading, because it applies to everything from the most routine matter to those that have do or die consequences for the business.  It seems rather hard to blame the English language for this assumed problem; it doesn’t seem beyond the wit of managers or professors to put qualifying adjectives in front of a relatively generic term.  However the more important issue is the way in which the author tries to classify decisions and, he does so using the traditional framework of the 2 x 2 matrix.

There is a certain cynicism around such matrices because they are so typical of business school and consultancy approaches to solving business problems.  Some, like the BCG growth/share matrix, have proved valuable and have stood the test of time; others tend to over-simplify and have not had a lasting impact.  This matrix has as its first dimension the control that managers have over the outcome, plotted on a range from low to high.  The second dimension - more difficult to relate to - is whether performance is measured in absolute or relative terms; do we have to achieve a defined quantified goal or do we have to outperform competitors?

These two dimensions enable the establishment of four ‘fields’ which conceptualise four different types of decision;

-  Low control, absolute performance = Making judgments and choices

- Low control, relative performance = Placing competitive bids

- High control, absolute performance = Influencing outcomes

- High control, relative performance = Managing for Strategic Success

This matrix is not as easy to relate to as some other strategic frameworks but that should not necessarily be a barrier to value and relevance; simplistic frameworks can often be engaging but do not have practical application.  Therefore I read the explanations of each field with a challenging but positive frame of mind.

The first field is likened to buying products in a supermarket; you cannot control the price and you are not competing with anybody; the authors advocate that in this scenario, management’s main task is to eliminate the biases that so often occur in business decisions, to accept the lack of control and competition and go for the rational option.  Optimistic bias in circumstances that cannot be controlled is to be discouraged and countered.

The second field is where control is at its highest and there is no competitive impact on performance.  In this case the attitude to bias is quite different.  The authors argue that optimistic bias can be useful and important as a motivator and an influencer of performance.  As someone with a financial background, my immediate thought was the impact on sales and profit forecasts of such a deliberate bias but the argument is that managers should move in and out of the positive mindset, making the distinction between motivating targets and realistic projections.  MTPs experience with a number of top companies is that this is more easily said than done.

The third field is where you have low control and your performance is measured against competitors.  The authors suggest that, in this situation, the key skill is to make decisions that anticipate what your rivals might do, which seems to be in the category of blindingly obvious statements.  However the message here is that those making decisions should understand game theory and realise the limitations of their ability to influence events.

Finally, there is the fourth field where there is high control and relative performance measurement, which is the main area where strategic decision making can and should come into its own.  You can control events and your decisions can create competitive advantage.   Launching new products and acquiring other companies are examples of decisions in this fourth field. 

I was just beginning to write off this framework under the heading of ‘so what?’ when I came upon what seems to be the main insight from the authors’ thinking.  They suggest that success with the decisions in this fourth field of high control and high competition can only come if there is the right balance between dispassionate analysis and the self-belief which pushes the boundaries of what can be achieved.  This is referred to as combining left and right brain thinking, a new adaptation of a familiar concept, one that the author has covered in his previous work.   This made me wonder if Rosenweig is just trying to find a new context and framework to slot into his existing theories.

The article finishes with the conclusion that senior managers will only succeed if they go through two stages.  The first is to decide upon the field that the decision falls into; the second is to decide on the approach that fits best.  This means to decide whether to be a tactician, a gambler, a psychologist or a strategist. 

Overall I found myself less than impressed by the logic and the conclusions, which was confirmed in my discussions with Chis Goodwin, MTP’s strategy specialist.  We are not convinced that the distinctions are as black and white as is claimed and would like to have seen more business related examples to help us to see the practical implications.  We do not believe that this framework will stand the test of time.

Read the full article; http://hbr.org/2013/11/what-makes-strategic-decisions-different/ar/1