Improving strategic decision making A CIMA case study
Page 2: The decision making process
Effective strategic business decisions bring together the right resources for the right markets at the right time. Timing is crucial. For example, Tesco developed its online ordering and delivery service as internet shopping expanded. Virgin sold off its music stores as downloading music became more popular.
The quality of a company's decision making helps it gain an advantage over competitors. Business decisions must reflect an organisation's aims (its purpose), such as to maximise returns for its shareholders. They should also relate to its objectives (its goals), such as to be the market leader in its field. To achieve its aims and objectives, a business puts in placestrategies. This approach applies regardless of the size of the business.
Consider a local bakery that operates a small cafe business. The cafe is open from 9am to 4pm, Monday to Friday. Competition from a nearby supermarket and fast food outlets is preventing the cafe business from growing. What action could the cafe take to increase sales?
The key issue to identify is why customers are choosing other outlets. Is it because of location, price or product quality? Analysing a problem of this kind needs a systematic approach.
Talking to customers about what they like, visiting other outlets to see the competition and examining in-house data on costs, pricing and service could provide valuable information. Based on this research, alternative courses of action might include cutting costs in order to reduce prices or promoting the cafe in different ways.
The business chooses actions based on evidence in support of its objectives. The decision may be a hard one. As a last resort, the bakery may need to exit the cafe market altogether if it cannot combat the competition and increase sales. Monitoring the feedback from, or outcomes of, a decision allows the business to know what is working and what is not, which leads to a new decision making cycle.
A rational decision making approach can help to reduce uncertainty. However, the external environment of a business adds variable factors which can increase risk. For example, suppose an engineering business needs new cost-saving technology to improve production and make it competitive. Justifying this expenditure becomes more difficult in a recession. However, what is the risk of not taking action? Will the business survive without the technology?
It is also important to balance risk against the likely return on investment. The extent to which this happens may depend on the organisational culture. Some businesses encourage risk taking; some are more risk-averse. Virgin reflects its owner, Richard Branson, an entrepreneur who thrives on risk taking (both in business and in his personal life). The Nationwide Building Society, which has a duty to safeguard its members' money, adopts a more cautious approach. High-performing organisations use the skills of their people to ensure they make more effective decisions than poor ones.