An integrated framework for strategic decision-making following a shock event

Lloyd Milliner
Graduate School of Management
Griffith School of Business
Griffith University
Nathan, QLD 4111
Australia
Email: [email protected]

Ingrid Bonn (presenter)

Graduate School of Management,
Griffith School of Business
Griffith University
PMB50 Gold Coast Mail Centre
Queensland 9726
Australia
Email: [email protected]

Sharyn Rundle-Thiele
Graduate School of Management
Griffith School of Business
Griffith University
Nathan, QLD 4111
Australia
Email: [email protected]

Please address all correspondence to Sharyn Rundle-Thiele

Stream A: Business Policy & Strategy

Abstract

The purpose of this paper is to investigate the impact of shock events on strategic-
decision making and the processes and strategies that organisations have put in place
to cope with such events. It integrates research on strategic decision-making and crisis
management to develop an integrated framework of strategic decision-making after
shock events. Our central argument is that shock events influence strategic decision-
making processes and the role of decision makers. A number of propositions were
developed to guide future research.

Keywords: Strategic decision-making, shock event.

Introduction

The tourism and travel industry, already a highly volatile environment, has become
increasingly susceptible to shock events generated outside the industry. For example,
the September 11 attack and the second Gulf war caused devastation to the global
tourism industry, seeing the demise of airlines such as Swissair and Sabina and huge
losses for United Airlines, American Airlines, British Airways and Qantas (UK
Financial Times, 22/2/03, 25/2/03), as tourists were fearful of travelling following
these events. Many smaller travel agencies declared bankruptcy and a number of large
hotel chains are still suffering from the effects of September 11 (Stafford, Yu and
Armoo, 2003). Since September 11, there have been the bombings of the Sari
nightclub and the Marriott Hotel in Jakarta, both in Indonesia, Australia’s closest
neighbour. Lastly, recent health epidemics such as Severe Acute Respiratory
Syndrome (SARS) and the avian influenza (bird flue) scare also poses serious threats
to the survival and prosperity of tourism and travel businesses not only in Australia
but worldwide (The Weekend Australian, 13-14/4/03; Australian Financial Review,
22/4/03).

The aim of this paper is to integrate research on strategic decision-making and crisis
management to develop an integrated framework of strategic decision-making in
crisis situations. Our integrated framework will contribute to existing literature and
strategic management practice in a number of ways. First, we contribute to a more
comprehensive understanding of strategic decision-making by contending that shock
events not only influence strategic decision-making processes, but also the role of
decision-makers and the use of strategic decision-making tools. Second, our
integrated approach provides senior managers with a clearer understanding of
strategic decision-making following shock events. It will help to guide senior
managers in the aftermath of shock events and enable them to better cope with such
events.

There are four main sections in this paper. The paper commences by identifying the
parameters of this research to present the research problem. In the second section we
review the literature on strategic decision-making and crisis management. The
strategic decision-making review looks at strategic decision makers, the internal and
external context of strategic decision-making, and the types of strategic decision-
making processes. The crisis review discusses previous research on the impact of
crises on strategic decision-making. The third section of this paper outlines an agenda
for future research and the fourth and final section presents the conclusion.

Research Problem

The term ‘shock event’ is rarely used in the literature. Writers tend to talk rather of
‘crisis’ or ‘disaster’. There are more than 4,000 references examining crisis and
disasters in variety of contexts. Contexts examined to date include the social and
economic impact of crisis (e.g., Edmunds, 2003; Seneviratne, 2003; Yates, 2004), the
financial impact of crises (e.g., Doraisami, 2004; Healy, 2004; Phelps, 2004) and the
impact of crises on employees (e.g., Frankenberg et al., 2003; Kondrasuk, 2004; Roth,
2004).

Pearson and Clair (1998) define organisational crisis as “…a low-probability, high-
impact event that threatens the viability of the organisation…” Carter (1991) defines a
disaster as “an event, natural or man-made, sudden or progressive, which impacts
with such severity that the effected community has to respond by taking exceptional
measures”. Prideaux et al. (2003) describe disaster as “…unpredictable catastrophic
change that can normally only be responded to after the event…” They classify the
highest shock level as ”not anticipated, sudden and very low level of forecast
certainty”.

While the terms ‘crisis’ and ‘disaster’ are most frequently used in the literature the
term ‘shock event’ is the focus of this paper since it emphasises suddenness and
unpredictability. This has become particularly evident in recent and continuing
terrorist attacks. Moreover, a crisis is seen as a situation that has been brought on by a
particular event, which is called here shock event. Lastly, a shock event may have an
initial negative impact due to its sudden and unexpected occurrence, but may not
necessarily lead to a crisis.

For the purpose of this paper, a shock events is defined as:

A sudden, unexpected and unpredictable externally generated event that causes

significant negative stress in the industry and in individual organisations, seriously
threatening the profitability and existence of an organisation.
Figure 1 outlines the framework for the literature review to address the research
question: How have recent shock events impacted on strategic decision-making
processes in companies in the tourism and travel industry?

Figure 1: Research Problem Framework

Literature Review

Strategic Decision-Making

Strategic decisions are those that are “important in terms of the action taken, the
resources committed, or the precedents set” (Mintzberg, Raisinghani and Theoret,
1976: 246). They are typically made by upper-level management and affect the long-
term health of the organisation (Eisenhardt and Zbaracki, 1992). Previous studies
have provided important insights into rational and bounded rational processes of
decision-making (Eisenhardt, 1989; Nutt, 1989), the role of power and politics
(Pettigrew, 1973), and the importance of chance and random confluence of events
(Cohen et al., 1972).

Decision-making has been studied in a variety of social science literatures including

marketing (Nowlis and Simonson 1996; Sivakumar and Raj 1997) organisational
behaviour (Connolly and Wagner 1988; Beach and Mitchell 1998), strategic
management (Eisenhardt and Zbaracki, 1992; Eisenhardt, 1999), and psychology
(Tversky and Kahneman, 1983; Beach, 1990; Bazerman, 2002). Within marketing
science empirical research includes both consumer (Simonson 1989; Tellis and Gaeth
1990; Nelson and Puto 1998; Kivetz and Simonson 2000) and organisational or
group-based decision-making (Irwin and Davis 1995; Dawes et al. 1997; Weatherly
and Beach 1998).

The literature recognizes board of directors, chief executive officers and top
management teams as the main decision-makers in organisations. McNulty and
Pettigrew (1999) for example argue that board members influence the decision-
making process by “shaping the ideas that form the content of company strategy and
the methodologies and processes by which those ideas evolve” (p. 47). Other authors
argue that CEOs are the ultimate decision-makers whose effectiveness is based on
their insight into their own work (for example Mintzberg, 1975) and that CEO’s tend
to make lone decisions when the organization is perceived to be under threat (Staw et
al., 1981; Tjosvold, 1984; Dutton, 1986). Westphal and Frederickson (2001) suggest
that new CEOs have an effect on strategic change, but that this could mask the effects
of the board. Pfeffer and Salancik (1978) argue that instead of having an all-knowing
single chief executive, the organisation should have a number of executives with
individual expertise in their respective area of specialization, effectively forming a
decision-making or top management team, chaired by the CEO. Based on the above
literature, we argue that the actual decision-makers vary according to the external and
internal context in which strategic decision-making takes place and the type of
decisions to be made.

Internal and External Context of Strategic Decision-Making

A number of studies have examined the internal and external influences on the
decision process. Internal influences on the decision process include goals of the
decision maker (Bettman et al. 1998), decision situation (Benson and Beach 1996),
decision context (Simonson and Tversky 1992), knowledge (Alba and Hutchinson
1987; Bettman and Park 1980), emotions (Arnould et al., 2004), characteristics of the
decision task such as information presentation (Bettman and Kakkar, 1977),
organisational capabilities and resources (Flannery and May, 2000; Hitt et al., 2001;
Aragon-Correa, 2003), organisational culture and strategy (Bowen and Helfat, 2001;
Jackson, 1993), and finally individual behaviour and cognitive bias (Bazerman, 2002;
Sharma, 2000).

External factors influencing strategic decision-making include technology factors

(Laplante et al., 2004), political and legal conditions (Arragon-Correa, 2003; Elenkov,
1997; Goll and Rasheed, 1997), and competition and consumer demand (Malnight,
2001; Thompson and Troester, 2002). Changing, volatile and new environments are
perceived as risks and such risks result in strategic trade-offs in order to reduce the
risk factors (Shrader et al., 2000). Zajac et al. (2000) showed a clear link between
specific environmental forces - e.g., high interest rates, and organisational resources,
such as competency deficiencies - and strategic decision-making by modelling the
dynamics of strategic fit. This is consistent with findings by Forte et al. (2000) who
conclude that a fit between environmental contingencies and organisational form
relates to enhanced company performance.

Strategic Decision-Making Processes

The literature suggests that strategic decision-making processes can be broadly

divided into three categories, namely rational and analytical (Harrison, 1999),
incremental and opportunistic (Quinn, 1993; Dess et al., 1997; Mintzberg et al., 1998;
Barringer and Bluedorn, 1999), and consultation and consensus (Smart and Vertinsky,
1977; Pascale, 1984; Eisenhardt and Brown, 1998; Branson, 2000). Rational and
analytical decision-making processes assume that the decision-maker moves through
a predetermined sequence of steps and selects the most effective and advantageous
option available. However, Weick (1993) argues that rational decision-making
strongly depends on making sense. An incremental and opportunistic approach is
usually guided by ‘emergent’ strategies (Mintzberg and Waters, 1982) and responds
flexibly to rapidly changing conditions in the environment. An approach based on
consultation and consensus involves broad consultation with key people before the
announcement of key strategies.

Table 1 positions shock events within the external and internal context of strategic
decision-making.
Table 1: External and internal context of strategic decision-making

Context Predictable/Expected Unpredictable/Unexpected

Internal Organisational capabilities Sudden death or departure of

CEO or and/or key managers
Organisational culture and strategy

Individual behaviour and cognitive

bias

External Technology Shock event

Political and legal conditions

Competition and consumer demand

A review of the literature shows that previous researchers have addressed a number
of issues with regards to either strategic decision-making or shock events/crises;
however, the two concepts have not been linked. In addition, many researchers have
taken a narrow view of strategic decision-making and crisis prevention. This has lead
to a call for more interdisciplinary and integrated models and frameworks that better
address the new threats faced by businesses (eg. Papadakis, Lioukas and Chambers,
1998).

Hence, research is required that looks specifically at how shock events impact on
strategic decision-making processes. This research should be inter-disciplinary and
provide an integrated framework that better links the two concepts. The next section
of this paper presents an integrated conceptual framework to guide future research.

Research Agenda

Figure 2 expresses the research focus in an integrated framework, linking the relevant
components into a cohesive construct. The framework suggests that shock events
potentially affect not only decision-making processes, but also the role of decision
makers.

Figure 2: Integrated Conceptual Framework

Five propositions (P) have been developed to guide future research to address the
research question: How have recent shock events impacted on strategic decision-
making processes in companies in the tourism and travel industry? The propositions
were placed on the integrated framework and are placed on the integrated framework
(Figure 2) to illustrate the relevance of the propositions to the framework.

RQ1: How have recent shock events impacted on strategic decision-making

processes in companies in the tourism and travel industry?

As discussed previously, the literature identifies three basic types of strategic

decision-making processes. These are 1) rational and analytical, 2) incremental and
opportunistic, and 3) consultation and opportunistic. These processes are often
combined or otherwise altered as the situation demands (Quinn, 1993). During a time
of crisis or high uncertainty the decision-making process will become rational and
analytical, following a set procedure as part of a crisis or emergency plan (Harrison,
1999; Faulkner, 2001; Faulkner and Vikulov, 2001; Stafford et al., 2002). Hence, the
following propositions are posed:

P1 Decision-making processes will become rational and analytical in the short-

term (1-4 weeks) following a shock event.

P2 Decision-making processes will become consultative and consensus seeking in

the medium term (1-6 months) following a shock event.

A shock event and consequent crisis may expose severe weaknesses in an

organisation’s position in the market place (for examples, Miller, 1998; Goodrich,
2002; Prideaux et al., 2003; Calantone et al., 2003). Therefore, as a direct result of the
impacts of shock events, organisations may alter their strategies in order to strengthen
their future market position (Mintzberg and Waters, 1985; Faulkner, 2001; Faulkner
and Vikulov, 2001; Boin and Hart, 2003). Thus, the following proposition is posed:

P3 Decision-making processes will become opportunistic in the short-medium term

following a shock event.
Framing a problem is critical to finding the solution to the problem, or in other words,
the decision-maker must first correctly evaluate the problem before employing the
appropriate decision-making mechanism (Beach, 1990). The literature shows that
consultation and team agreement in times of uncertainty will improve decision-
making quality (Smart and Vertinsky, 1977; Quinn, 1993; Ianquinto and
Frederickson, 1997), hence leading to a better framing of the problem. Thus, the
following proposition is posed:

P4 The consultation and consensus process will lead to improved framing of the
problem.

The literature on management and leadership recognises board of directors, chief

executive officers and top management teams as the main decision-makers. It seems
that shared leadership and/or decision-making between board of directors and/or top
management teams is prevalent during times of stability, whereas strong unitary
leadership is required and preferred during periods of uncertainty and instability
(Staw et al., 1981; Harrison, 1999; Waldman et al., 2001; Shen 2003). Thus, the
following proposition is posed:

P5 In the time period immediately following a shock event, the CEO will become
the ultimate decision maker.

Conclusion

This paper developed an integrated conceptual framework to link the relevant

components of strategic decision-making and crises management into a cohesive
construct. This framework suggests that shock events influence strategic decision-
making processes, the role of decision makers. A number of propositions were
developed to guide future research.
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Daily Newspaper References:

(22/2/2003), The World’s Companies Wait in Hope For the Fog of War to Clear, in
UK Financial Times.

(25/2/2003), BA Scales Back Flights to Gulf after London’s Travel Warning, in UK

Financial Times.

(13-14/4/2003), Deadly Serious; SARS Begins to Choke Our Airways, in The

Weekend Australian.

(22/4/2003), Singapore Counts Cost of Virus; Video Conferencing Used to Beat

SARS, in The Australian Financial Review.

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