UNIT 3

Part I: Strategy

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Management
Fifteenth Edition, Global Edition

Chapter 2
Making Decisions

Chapter 9
Managing Strategy

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Learning Objectives
Decision

 Describe the eight steps in the decision-making process.

 Explain the five approaches managers can use when making decisions.

 Classify decisions and decision-making styles.

 Describe how biases affect decision making.

 Identify cutting-edge approaches for improving decision making

Strategy
 Define strategic management and explain why it’s important.
 Explain what managers do during the six steps of the strategic management
process.
 Describe the three types of corporate strategies.
 Describe competitive advantage and the competitive strategies organizations
use to get it.

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DECISIONS MANAGERS

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Decisions Managers May Make: Planning
and Organizing

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Decisions Managers May Make: Leading
and Controlling

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 Be A Better Decision Maker: Decision-
Making Process

Decision—a choice among two or more

alternatives

Decision-Making Process

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The conditions under which managers make
decisions, and decision-making styles.
• Rationality
• Bounded Rationality
• Intuition
• Evidence-Based Management
• Crowdsourcing

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Rationality
• Rational Decision Making: choices that are logical and
consistent and maximize value
• Assumptions of rationality:
– Rational decision maker is logical and objective
– Problem faced is clear and unambiguous
– Decision maker would have clear, specific goal and be
aware of all alternatives and consequences
– The alternative that maximizes achieving this goal will
be selected
– Decisions are made in the best interest of the
organization

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Bounded Rationality
• Bounded rationality: decision making that’s rational, but
limited by an individual’s ability to process information
• Satisfice: accepting solutions that are “good enough”

Intuition

• Intuitive Decision Making: making decisions on the

basis of experience, feelings, and accumulated
judgment

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Evidence-Based Management
• Evidence-based management (EBMgt): the systematic
use of the best available evidence to improve
management practice.

Crowdsourcing
• Crowdsourcing: a decision-making approach where you
solicit ideas and input from a network of people outside of
the traditional set of decision makers.

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Types of Decisions: Structured Problems
and Programmed Decisions
• Structured problems: straightforward, familiar, and easily
defined problems
• Programmed decisions: repetitive decisions that can be
handled by a routine approach

Types of Programmed Decisions

– Procedure: a series of sequential steps used to respond to a well-
structured problem
– Rule: an explicit statement that tells managers what can or cannot be
done
– Policy: a guideline for making decisions

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Types of Decisions: Unstructured Problems
and Nonprogrammed Decisions
• Unstructured problems: problems that are new or
unusual and for which information is ambiguous or
incomplete
• Nonprogrammed decisions: unique and nonrecurring
and involve custom-made solutions

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Exhibit 2.7 Programmed vs.
Nonprogrammed Decisions
Characteristic Programmed Nonprogrammed
Decisions Decisions
Type of problem Structured Unstructured
Managerial level Lower levels Upper levels
Frequency Repetitive, routine New, unusual
Information Readily available Ambiguous or incomplete

Goals Clear, specific Vague

Time frame for solution Short Relatively long

Solution relies on… Procedures, rules, Judgment and creativity

policies

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Decision-Making Styles
• Research has identified four different individual decision-
making styles based on two dimensions:
1. An individual’s way of thinking
2. An individual’s tolerance for ambiguity
• The four styles are
– Directive
– Analytic
– Conceptual
– behavioral.

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Four Decision-Making Styles
• Directive style: low tolerance for ambiguity and seek
rationality
– They are efficient and logical but may be prone to
making decisions too fast with limited information.
• Analytic style: seek rationality but have a higher tolerance
for ambiguity
– They are more willing to adapt to change or new
situations.

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Four Decision-Making Styles
• Conceptual style: intuitive decision makers with a high
tolerance for ambiguity
• – conceptual decision makers have a broad scope and
consider many alternatives. They are good at finding
creative solutions to problems
• Behavioral style: intuitive decision makers with a low
tolerance for ambiguity
• – behavioral decision makers work well with others. They
tend to avoid conflict and seek acceptance from others.
This tendency makes them receptive to suggestions from
others

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Exhibit 2.8 Decision-Style Model

Exhibit 2.8 shows the decision-style model from A. J. Rowe and J. D. Boulgarides,
Managerial Decision Making (Upper Saddler River, NJ: Prentice Hall, 1992), p. 29.

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Exhibit 2.9 Common Decision-Making Biases

Exhibit 2.9 identifies 12 common decision errors of managers and biases they may have.

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Decision-Making Biases and Errors (1 of 4)
• Overconfidence Bias: holding unrealistically positive
views of oneself and one’s performance
• Immediate Gratification Bias: choosing alternatives that
offer immediate rewards and avoid immediate costs
• Anchoring Effect: fixating on initial information and
ignoring subsequent information

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Decision-Making Biases and Errors (2 of 4)
• Selective Perception Bias: selecting, organizing and
interpreting events based on the decision maker’s biased
perceptions
• Confirmation Bias: seeking out information that reaffirms
past choices while discounting contradictory information
• Framing Bias: selecting and highlighting certain aspects
of a situation while ignoring other aspects

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Decision-Making Biases and Errors (3 of 4)
• Availability Bias: losing decision-making objectivity by
focusing on the most recent events
• Representation Bias: drawing analogies and seeing
identical situations when none exist
• Randomness Bias: creating unfounded meaning out of
random events

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Decision-Making Biases and Errors (4 of 4)
• Sunk Costs Errors: forgetting that current actions cannot
influence past events and relate only to future
consequences
• Self-serving Bias: taking quick credit for successes and
blaming outside factors for failures
• Hindsight Bias: mistakenly believing that an event could
have been predicted once the actual outcome is known
(after-the-fact)

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Cutting-Edge Decision Making
• Technology has changed the ability of managers to access
information. Two technology driven cutting-edge aides to
decision making are:
– Design thinking: approaching management problems
as designers approach design problems
– Design thinking means opening up your perspective
and gaining insights by using observation and inquiry
skill and not rely simply on rational analysis

What is something completely new that would love if

existed but doesn't now???

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Big Data and Artificial Intelligence

• Big data and Artificial Intelligence: big data refers to

huge and complex data sets now available. Big data has
opened the door to widespread use of artificial intelligence
(AI)
• Big data: the vast amount of quantifiable data that can be
analyzed by highly sophisticated data processing
• Can be a powerful tool in decision making, but collecting
and analyzing data for data’s sake is wasted effort

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STRATEGY

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What is Strategic Management?
• Strategic management: what managers do to develop the
organization’s strategies
• Strategies: the plans for how the organization will do what
it’s in business to do, how it will compete successfully, and
how it will attract and satisfy its customers in order to
achieve its goals
• Business model: how a company is going to make money

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Why is Strategic Management Important?
• Has a positive impact on performance

• Helps managers decide how to act in face of change and

uncertainty

• Helps complex and diverse organizations work together

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Exhibit 9.1 Strategic Management Process

Exhibit 9.1 illustrates the six-step process of strategic management, which encompasses
strategy planning, implementation, and evaluation.

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Step 1: Identifying the Organization’s
Current Mission, Goals, and Strategies
• Mission: a statement of the purpose of an organization.
The mission statement addresses the question:
• What is the organization’s reason for being in business?
• The organization must also identify its current goals and
strategies.

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 Step 2: Doing an External Analysis

• Influential factors such as competition, pending legislation,

and labor supply are included in the external environment.
• Opportunities are positive trends in external
environmental factors;
• Threats are negative trends in environmental factors.
• Because of different resources and capabilities, the same
external environment can present opportunities to one
organization and pose threats to another

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Step 3: Doing an Internal Analysis
• Resources: an organization’s assets that are used to
develop, manufacture, and deliver products to its
customers
• Capabilities: an organization’s skills and abilities in doing
the work activities needed in its business
• Core competencies: the organization’s major value-
creating capabilities that determine its competitive
weapons
• Strengths: any activities the organization does well or its
unique resources
• Weaknesses: activities the organization does not do well
or resources it needs but does not possess
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SWOT Analysis
• SWOT analysis:

• The combined external and internal analyses are called

the SWOT analysis, an analysis of the organization’s
strengths, weaknesses, opportunities, and threats.
• After completing the SWOT analysis, managers are ready
to formulate appropriate strategies:
– (1)exploit an organization’s strengths and external
opportunities, (2) buffer or protect the organization from
external threats, or (3) correct critical weaknesses.

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Step 4: Formulating Strategies
• Three main types of strategies managers will formulate:
– Corporate
– Competitive
– Functional

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Step 5: Implementing Strategies
• No matter how effectively an organization has planned its
strategies, performance will suffer if the strategies aren’t
implemented properly.

Step 6: Evaluating Results

How effective have the strategies been at helping the
organization reach its goals?

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Exhibit 9.3 Types of Organizational Strategies

Exhibit 9.3 shows the three types of strategies organizations use: corporate, competitive,
and functional.

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What is Corporate Strategy?
• Corporate strategy: an organizational strategy that
determines what businesses a company is in or wants to
be in, and what it wants to do with those businesses

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What Are the Types of Corporate Strategy?
• Growth strategy: a corporate strategy that’s used when
an organization wants to expand the number of markets
served or products offered, either through its current
business(es) or through new business(es)
– Concentration
– Vertical integration (backward, forward, or both)
– Horizontal integration (with competitors)
– Diversification (either related or unrelated)

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Stability and Renewal Strategies
• Stability strategy: a corporate strategy in which an
organization continues to do what it is currently doing

• Renewal strategy: a corporate strategy designed to

address declining performance

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Competitive Strategies
• Competitive strategy: an organizational strategy for how
an organization will compete in its business(es)
• Strategic business unit (SBU): the single independent
businesses of an organization that formulate their own
competitive strategies

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The Role of Competitive Advantage
• Competitive advantage: What sets an organization apart;
its distinctive edge
• Competitive advantage: That distinctive edge can come
from the organization’s core competencies by doing
something that others cannot do or doing it better than
others can do it.
– Quality
– Low cost
– Technology
– Other factors

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Sustaining Competitive Advantage (1 of 2)
Businesses must not only develop a competitive advantage
but they must also sustain it.
• Economic Moat: sustaining competitive advantage by
protecting long-term profits and market share using various
means.
• Economic moat was a term popularized by Warren Buffett
as a way to visualize the concept of keeping a competitive
advantage.

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Choosing a Competitive Strategy
• Cost leadership strategy
When an organization competes on the basis of having the lowest costs
(costs or expenses, not prices) in its industry. A low-cost leader is highly
efficient. Overhead is kept to a minimum, and the firm does everything it
can to cut costs.

• Differentiation strategy
• A company that competes by offering unique products that are widely
valued by customers. Product differences might come from
exceptionally high quality, extraordinary service, innovative design,
technological capability, or an unusually positive brand image.
Practically any successful consumer product or service can be
identified as an example of the differentiation strategy.

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Choosing a Competitive Strategy

• Focus strategy
• This strategy involves a cost advantage (cost focus) or a differentiation
advantage (differentiation focus) in a narrow segment or niche.
Segments can be based on product variety, customer type, distribution
channel, or geographical location.

• Stuck in the middle

• An organization becomes stuck in the middle when its costs are too
high to compete with the low-cost leader or when its products and
services aren’t differentiated enough to compete with the differentiator.

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Functional Strategies
• Functional strategies: a strategy used by an
organization’s various functional departments to support
the competitive strategy

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Examples of Differentiation Strategies
• Quality
• Innovation strategies
– Transfer technology from one division to another
– Invest in R&D
– Improve the process
– First mover: an organization that’s first to bring a
product innovation to the market or to use a new
process innovation

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Exhibit 9.4 First Mover Advantages and
Disadvantages

Exhibit 9.4 shows the advantages and disadvantages of being a first mover.

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Other Differentiation Strategies
• Customer Service
• Mass Customization
• Social Media

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