Making Strategic Decisions

1. Making Strategic Decisions BUSS4 - Making Strategic Decisions

2. Strategic Decisions • The word strategy means a plan for meeting your objectives • Strategic thinking means visualising what you hope to achieve within the coming years, assessing the strengths of your business in relation to those aims, then identifying an approach that can enable you to get there • This is normally done at a senior management level • A strategic plan will then be put in place • Strategic decisions are the result of strategic thinking • Examples • In 1990 Nokia decided to move from being a car tyre maker to the mobile business • In 2001 Northern Rock decided to move from a building society to be a major bank • These can be contrasted with day to day decisions - tactical decisions Insert table 51.1 P366

3. Important influences on strategic decision making Relative power of stakeholders • In the 1990s Arsenal FC were doing well • Trophies kept coming and their main rival was Manchester United • The supporters loved the club, the manager and the ground (Highbury) • They felt sure the good times would keep coming • Arsenal’s directors were not so sure • Man U were gradually expanding Old Trafford to take twice the number of people that Arsenal could take • If Man U could generate twice the income how would Arsenal be able to compete? • They made the strategic decision to move to the 60,000 seat Emirates stadium • They were able to do this because Arsenal shares were held by a few wealthy people • If the shares had been held by the public this may not have been possible • Directors can make bold decisions only if they are supported by shareholders (if it is a plc)

4. Important influences on strategic decision making Available resources • Arsenal’s GBP400m gamble was very difficult to finance but it proved possible • In other cases a business may have a brilliant idea but be unable to secure the necessary finance • It may lack the internal finance and find it impossible to persuade outsiders • It depends on how willing banks are to lend • Top companies try to make sure they always have enough cash to put strategic decisions into practice • In 2007 Apple had $16bn of cash and cash investments on its balance sheet • Tesco was in a very strong position in 2007 to declare that in the following 5 years it would invest GBP250m a year in building stores in America Ethical Position • Firms nowadays have to make strategic decisions that are ethical • Innocent had done little to deserve its reputation as an ethical business but people thought it was • Because this was working so well it decided to maintain its socially conscious image by switching to fully recyclable packaging and giving 10% of profits to social causes

5. Different approaches to strategic decisions • There are two alternatives – evidence based (scientific) or hunch • Either method can be successful or unsuccessful • There is no evidence that either is better • In 2007 Whitbread Plc went through a detailed analysis of the four operating divisions of its business • It decided that it could sell its dog and its cow and concentrate on its 2 rising stars • The dog (the restaurants including Beefeater) were difficult to sell • The cash cow (the David Lloyd Leisure centres) were sold for GBP925m • In this case the strategic decision was based on evidence of financial performance • It was logical – perhaps scientific • In 2007 Richard Branson said he wanted to buy Northern Rock • This was before there was a clear understanding of the Bank’s difficulties • He was acting on a hunch • He would no doubt have got his accountants to check he numbers before signing anything but he made a strategic decision to place himself at the centre of the Northern Rock affair • Branson has made a huge success by making hunch decisions

6. The significance of information management • The bosses of most plcs make their decisions on the basis of data, not hunches • Therefore information management is crucial • You need to have full knowledge of your own business • This might seem obvious but firms are often too large to be aware of everything • In Jan 2008 a major French bank found that one of its own employees had been gambling with 50bn Euros of the bank’s money • A huge bank that, one week, was considering plans for its long term future, was, the next week, fighting for its short term survival • Few business have such large problems but it is not unusual to find out too late that sales are worse that expected • Good companies have good, up-to-date information about themselves • This requires IT systems that show instantly how the business is doing so that senior directors can think quickly about whether current strategies are working • If they are not it is time for a radical rethink

7. Issues for Analysis • Chief Executives of plcs are paid huge sums of money to run large businesses on behalf of shareholders • The high sums are paid because these firms have to attract people who can get strategic decisions right • Tesco’s Sir Terry Leahy had successfully steered the company into eastern Europe and the Far East so shareholders trusted his 2007 decision to spend GBP1,250m moving Tesco into America • He will have gathered as much information about the US grocery market as possible but ultimately the decision will be made as much on the basis of a hunch (back by huge experience) as on the basis on scientific evidence • When you are looking at a business situation in an exam you should ask these key questions • Did the business do all it could to gather data? • Has the business made effective use of relevant assets (including the expertise within its staff)? • Does the leadership have the experience and wisdom to make a sound judgement and then ensure that the new approach is carried through effectively? • Has the business got the financial and human resources to turn the right idea into the right strategy?

8. Evaluation • If the strategic thinking is right then the strategic decisions should be right • Sometimes pressures upon decision makers lead to mistaken compromises • Shareholders who are unhappy about short term profitability may not be willing to back a strategic decision that has a 5 year time frame • Short term cost cutting may be the only language the shareholders understand • It is the job of the highly paid chief exec to find the right balance between what is right and what is acceptable