Trade Off "In Strategic Decision Making"
Why Strategy is so important in Today's Business Decision Making?
The foundation of strategy or strategic decision making is based on the trade off you make between alternatives that can be aligned with a vision for the future and a philosophy to peruse sustainable advantage by leading the vision through continues innovations.
What was the old strategy that is not today’s most significant alone?
History has taught us total quality management and operational efficiency alone is not a strategy for many reasons. First it is mach-able, penetrate-table, and easy to imitate. It doesn’t last a lifetime, and it can drive organizations to be bankrupt or near bankruptcy. To help understand more this scenario, looking back at the Japanese who they invented TQM and made operational efficiency their only strategy as a tool to deliver superior quality products at reasonable and low price compared to their European and American counter-part. It was successful at first, and the Japanese made history in organizational efficiency were they had the world benchmark their practices and helped make a race in the world global economy to reorganize and concentrate on TQM as a key strategy to succeed in the Seventies all the way until mid Nineties. Having said that, and analyzing the situation from a financial perspective, history had showed us that profit to sales ratio has been higher in the seventies and eighties than that of the mid nineties. The main reason is simple. Take this small example, Toyota and Honda is both Japanese know car makers that compete in their local markets and globally as well. They have matched each other’s organizational efficiency and benchmark each other’s activities until they have become alike and they ran out of new ideas that you can’t differentiate a Honda car from a Toyota only by price positioning. Based on price competition alone, organizations will have profit diminish year on year and operational efficiency alone can’t save the organization from bankruptcy or near bankruptcy. For these reasons, organizations that compete globally should look into sustainable strategies as a key success to their survival and not operational efficiency as a strategy alone. Operational efficiency is a given in today’s business and it should be a starting point to move to the next level of utilizing these efficiencies in a whole new vision and strategic thinking with a future forward plan shared and communicated with the whole organization to implement and create utilities with sustainable business units collaborating with internal and external suppliers by forming a global conglomerate sustainable enough to hold until at least a decade.
Why do managers avoid making strategic choices?
Why do so many companies fail to have a strategy? Why do managers avoid making strategic choices? Or, having made them in the past, why do managers so often let strategies decay and blur? Managers have become confused between operational efficiency and strategy. They have made progress in cutting costs, developing efficient process, improved quality, and utilized the economies of scale to the best interest of the organization, but with all these initiatives a true strategy is yet to be developed. Many managers have looked at operational effectiveness arrogantly, therefore, they by-pass a true vision and a futuristic plan pushing forward growth and sustainability at the same time. They have developed a macho image that with their business effectiveness and resources they can crush any competitor and withstand change aggressively and effectively. For these main reasons mangers have lost a vision for the future and a strategy to bring the organization to the next level has been diminished. Let’s take a look at Maytag, a leader and a strong brand in the dishwashing and laundry machines product line. In the mid eighties Maytag wishing to grow has taken a decision to expand its product range and acquired other brands like: Jenn-Air, Hardwick Stove, Hoover, Admiral, and Magic Chef. Maytag has grown substantially from $684 million in 1985 to a peak of $3.4 billion in 1994, but return on sales has declined from 8% to 12% in the 1970s and 1980s to an average of less than 1% between 1989 and 1995. Cost cutting will improve this performance, but laundry and dishwashing products are still the most profitable product range among all. Let us analyze Maytag decision to grow its product line on one hand, and to grow the core business by accessing new segments on the other hand. We have seen that having to make choices in business should be based on a vision on where you want to drive the company to and to whom you are targeting your products to. Maytag had a growth strategy in mind, but eventually took the wrong decision on how to take the company meet the growth profitability, and not just increasing sales and capturing market share. The more ideal trade-off at Maytag’s decision making should have been utilizing the strong brand image and grow gradually and profitably by access new markets within the core business. Maytag could have explore new world markets, Maytag could create products that caters to niche-market within it’s core customer base market segment by building new innovations and research new demands that help produce such strategies. Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a company had with its original varieties or target customers. Attempts to compete in several ways at once create confusion and undermine organizational motivation and focus. Profit fall, but more revenue is seen as the answer. Managers are unable to make choices, so the company embarks on a new round of broadening and compromises. Often, rivals continue to match each other until desperation breaks the cycle, resulting in a merger or downsizing to the original positioning.
The role of leadership in strategy
The challenge of developing or reestablishing a clear strategy is often primarily an organizational one and depends on leadership to drive it into success. In many companies, leadership has degenerated into orchestrating operational improvements and making deals. But the leader’s role is broader and far more important. General management is more than the stewardship of individual functions. Its core is strategy: defining and communicating the company’s unique position, making trade-offs, and forging fit among activities. The leader must provide the discipline to decide which industry changes and customer needs that company will respond to, while avoiding organizational distractions and maintaining the company’s distinctiveness. One of the leader’s important job is to coach subordinates about strategy and lead them to correct decision making by learning about trade-offs needed to be encountered aligned with the organizational vision and customers demands into consideration. Indeed, setting limits is another function of leadership. Deciding which target group of customers, varieties, and needs the company should serve is fundamental to developing as strategy; In addition, the choices made in deciding not to serve other customers or needs and not to offer certain features or services. Thus strategy requires constant discipline and clear communication. In fact, one of the most important functions of an explicit, communicated strategy is to guide employees in making choices that arise because of trade-offs in their individual activities and in day-to-day decisions. Companies like Procter and Gamble have bean top innovators in their industry due to a clearly communicated strategy and the leadership style they engage in their management system and organization. Every employee in P&G has the opportunity and the tools to innovate and come up with new Ideas for next generation products, or new process to do a certain function with cost saving without compromising quality and limiting demand. P&G has been in business for over 170 years owning 300 brands and a distribution network reaching over 170 countries with global offices in over 80 countries. A company of this magnitude has really build their success because they do study and learn about their customer’s needs, asking the questions: what makes them happy, how can we improve the use of a certain product, how can we solve certain problem, how can we reach a niche-segment market within the core product range, what packages to make, how to differentiate our brands from imitators, how to counter in-store generic brands, how to build loyalty to the brand, and many more questions that teaches P&G to be the leader and own innovative products and brands that generate 80 to 90 billion dollars in sales per year (2008). Thus, in their industry are highly valued among their customers.
Alternative views of strategy
The two main views of strategy is one, discussing the model of the past. The other one is discussing a sustainable competitive advantage of the present till the near future. Lets take a look at both models in the below diagram.
The Implicit Strategy Model of the Past
Aggressive outsourcing and partnering to gain efficiencies
Benchmarking of all activities and achieving best practice
Sustainable Competitive Advantage
Activities tailored to strategy
Clear trade-offs and choices vis-à-vis competitors
Competitive advantage arises from fit elements across activities
Sustainability comes from the activity system, not the parts
Unique Competitive position for the company
Operational effectiveness is a given
Michael E. Porter, “What is Strategy?” Harvard Business Review, November-December 1996: 61:78
Paul Milgrom and John Roberts, “The Economics of Modern Manufacturing: Technology, Strategy, and Organization, “American Economic Review 80 (1990):511-528
Paul Milgrom, Yingyi Qian, and John Roberts, “Complementarities, Momentum, and Evolution of Modern Manufacturing, “American Economic Review 81 (1991) 84-88
Paul Milgrom and John Roberts, “Complementarities and Fit: Strategy, Structure, and Organizational Changes in Manufacturing, “Journal of Accounting and Economics, vol. 19 (March-May 1995): 179-208
Jan Rivkin, “The Rise of Retail Category Killers,” unpublished working paper, January 1995.