The influence of decision-specific
characteristics on the strategic decision
making process
Supervisor: Dr. Ranjita M. Singh Author: Geert Hogen Esch
Concept – 9 June 2014 Student ID: 5788404
University of Amsterdam Master of Science in Business Studies Amsterdam Business School Track: Strategy
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Abstract
This paper attempts to offer a deeper conceptual understanding of the reasons why certain processes are used when making strategic decisions. The notions and premises of the ten schools, as formulated by Mintzberg and Lampel (1999), are used to describe what these processes are and how they contribute to the strategic decision making process. Based on the reviewed literature, this paper argues that decision-specific characteristics (motive, importance and uncertainty) influence the strategic decision making processes. The second part of the study consists of an empirical investigation to test the formulated hypotheses. The results show support for two of the three formulated hypotheses. First, the categorization of the decision as a threat or opportunity has an influence on the chosen processes. Second, the perception of uncertainty as an information gap or mystery also has an influence on which processes are to be used in the strategic decision making process. This thesis thereby enriches the theory on strategy process research with a new theoretical framework. Managers can use this framework to engage in future strategic decisions.
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Contents
Abstract ... 2
1. Introduction ... 4
2. Theoretical background ... 7
2.1. The prescriptive schools ... 8
2.2. The entrepreneurial school ... 9
2.3. The cognitive school ... 9
2.4. The learning school ... 10
2.5. The power school ... 10
2.6. The cultural school ... 10
2.7. The environmental school ... 11
2.8. The configuration school ... 11
2.9. Decision-specific characteristics ... 12 2.9.1. Decision importance ... 12 2.9.2. Decision uncertainty ... 13 2.9.3. Decision motive ... 15 3. Methodology ... 17 3.1. Research sample ... 17 3.2. Item development ... 18 3.3. Data collection... 20 3.4. Data analysis ... 21 4. Results ... 22 4.1. Organization 1 ... 22 4.1.1. Decision 1 ... 22 4.1.2. Decision 2 ... 23 4.1.3. Decision 3 ... 24 4.2. Organization 2 ... 26 4.2.1. Decision 1 ... 26 4.2.2. Decision 2 ... 27 4.2.3. Decision 3 ... 29 5. Discussion ... 32 6. Conclusions ... 37 References ... 38
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1. Introduction
At the core of every business rests a strategy which carries the vision, goals and objectives formulated by the management, and an accompanying business model that comprises the implementation of these strategies. Although almost every strategy is unique, there are recognizable patterns in those processes of strategy formulation and implementation (Mintzberg & Waters, 1985). These two processes are often taken together under the label of strategy formation to stress their interrelatedness (Mintzberg and Lampel, 1999; Raes et al., 2011). In the research on strategy formation, Mintzberg and Lampel (1999) argue that thus far ten schools have been developed with different views on the process (see Table 1 for an overview).
Although each school has enjoyed considerable support both in academia and with practitioners, they fail to grasp the complete picture as each view sees the strategy formation process in a different way (Mintzberg and Lampel, 1999). Instead Mintzberg and Lampel (1999) argue that strategy formation should be seen as one process comprised of the ten different schools of strategy. Strategy formation should not only be about the positioning within the industry, or an emergent process in dynamic industries. It is not only created by the creative vision of one individual, or the negotiation activities of many. Strategy formation is much broader than that and encompasses all ten schools.
In another stream of work, the argument has been made that strategy formation research has seen a development from content research to process research. Since strategy consists of actions and decisions, why and how these actions and decisions are made have become increasingly important throughout the field (Hart, 1994; Mintzberg, 1976; Sminia, 2009). Research on the strategic decision making process has seen considerable advancements. Multiple studies have proven that decision-specific characteristics influence the processes used
5 in the formulation of the strategic decision, and the relative actions in the implementation of the strategy (e.g. Dean and Sharfman, 1993; Papadakis et al., 1998; Elbanna and Child, 2007). Decision specific characteristics such as the motive, uncertainty, and impact of the decision, may influence the strategic decision making processes.
The research with regards to these theories have left a gap to explore. This study makes a first attempt to fill this gap by utilizing the theoretical framework provided by Mintzberg and Lampel (1999) in the context of the strategic decision making process. Using a multi-perspective approach may give a broader and richer explanation of why and how particular processes are used when making strategic decisions. Comparative to the work done by Hart (1992) and Criado (2010), this thesis will first constitute a theoretical framework which presents the possible processes to be used in the strategic decision making process. These are mainly based on the ten strategy formation schools of Mintzberg & Lampel (1999), and enriched with relevant articles. This thesis then hypothesizes that the use of the notions and ideas of these ten schools are dependent on the decision-specific characteristics: motive, uncertainty and importance. The above leads to the following research question: “What is the
influence of the decision-specific characteristics (motive, importance and uncertainty) on the use of the ten schools of strategy formation?”
This study will make several contributions to theory and practice. First, with respect to theory, this study aims at further clarifying why and how certain strategy formation processes are used. These concepts can give insight into how organizations are achieving competitive advantage. Second, with respect to practice, this research gives managers a framework which they can use for future strategic decisions. To empirically support the arguments made, this study has conducted interviews at two organizations active in the Dutch health care industry.
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School Description Pre/Descriptive Process as...
Design Strategy formation as achieving the essential fit between internal strengths and weaknesses and external threats and opportunities. Senior management formulates clear, simple, and unique strategies in a deliberate process of conscious thought - which is neither formally analytical nor informally intuitive - so that everyone can
implement the strategies.
Prescriptive Conception
Planning Strategy formation process not just cerebral but formal, decomposable into distinct steps, delineated by
checklists, and supported by techniques (especially with regard to objectives, budgets, programs, and operating plans).
Prescriptive Formal
Positioning Generic positions selected through formalized analyses of industry situations.
Prescriptive Analytical Entrepreneurial Strategies as vague visions or broad perspective. The
leader maintains such close control over implementing his or her formulated vision.
Descriptive Visionary
Cognitive If strategies developed in people's minds, what could be understood about those mental processes? Cognition is used to construct strategies as creative interpretations, rather than simply to map reality in some more or less objective way, however distorted.
Descriptive Mental
Learning Strategy making as learning developed. Strategies are emergent, strategists can be found through-out the organization, and so-called formulation and implementation intertwine.
Descriptive Emergent
Power Micro power sees the development of strategies within the organization as essentially political - a process involving bargaining and confrontation among actors who divide the power. Macro power views the
organization as an entity that uses its power over others and among its partners to negotiate collective strategies in its interest.
Descriptive Negotiation
Cultural Common interest and integrations. Strategy formation as a social process rooted in culture.
Descriptive Social Environmental Contingency theory. Which responses are expected of
organizations facing particular environmental conditions and population ecology writings that claim severe limits to strategic choice. Institutional theory is perhaps a hybrid of the power and cognitive schools.
Descriptive Reactive
Configuration Sees organizations as configuration - coherent clusters of characteristics and behaviors - and integrates the claims of the other schools - each configuration. Change must be described as dramatic transformation.
Descriptive Transformation
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2. Theoretical background
The work of Mintzberg & Lampel (1999), and further developed in Mintzberg et al. (2005), summarizes the field of strategic management in ten different schools of thought (see Table 1). Each school has its own notions and premises on how and why the processes around strategy formulation and implementation should take shape. The schools offer pathways which organizations can undertake to achieve competitive advantage. Although each school could be used individually, strategy formation transcends the notions of one school or the other. Strategy formation includes more than just formal analytical methods or intuitive strategic guidance. It might even be that certain elements of strategy formation are not covered by the ten schools. There are however certain identifiable patterns in strategy formation. Organizations in a highly dynamic environment, for example, tend to utilize more of the notions and premises of the learning school because they need to be flexible to remain in alignment with the changing environment. On the other hand, organizations active in a stable environment use more ideas and notions from the prescriptive schools, such as strategic planning, because this could be more cost-effective when facing no threats from a changing external environment (Mintzberg & Lampel, 1999).
Since the strategic formation process consists of decisions being made and actions undertaken, the strategic decision itself is another antecedent of which processes are used. This raises another development in the research on strategic management. From primarily researching the content of the strategy processes, the research has shifted to researching the actual processes and their shape. Thus the research has put more focus on the explanation of how and why certain strategic decisions are made. The work of Pettigrew (2003) shows us that there is a need to understand the context surrounding these decisions, considering four factors: (1) characteristics of the decision makers, (2) decision-specific characteristics, (3) features of the external environment and (4) features of the internal organization. The use of the ten schools
8 of strategy formation processes are influenced then by these four factors. Visualized in Figure 1, the relationships between the factors and the ten schools are given.
Figure 1. The influences on strategy formation processes
This study will focus on the decision-specific characteristics and their influence on the strategy formation processes. The literature review will continue by explaining the ten schools in more detail. Afterwards the decision-specific characteristics will be described and the hypotheses will be formulated.
2.1. The prescriptive schools
The design, planning and positioning schools are taken together as the prescriptive school because of their overlapping characteristics and their intertwined utilization in the present business environment (Criado et al., 2010; Hart and Banbury, 1994). The strategy-making process is seen as a highly deliberate, linear, and logical one, involving a rational, sequential, and analytical set of procedures and techniques. Strategy formation is conceptually aimed at achieving the essential fit between internal strengths and weaknesses and external threats and opportunities by means of a highly formal and systematic analysis of both the internal organization and its competitive environment (Mintzberg, 1990). Sophisticated strategy
• Uncertainty • Complexity • Hostility/munificence
Decision-specific characteristics • Design • Entrepreneurial Decision-maker characteristics
• Importance • Planning • Power • Cognitive diversity • Uncertainty • Positioning • Culture • Demographic diversity
• Motive • Learning • Environmental
• Cognitive • Configuration
• Size • Performance
Strategy formation characteristics Environmental context
Internal context
9 decision-making process consists of integrated decisions, programs, budgets and operating plans that will set and achieve viable organizational goals. The decision makers are mainly strategists, senior managers and/or planners (analysts) of the organizations (Mintzberg and Lampel, 1999). They go through a rational and highly analytical decision-making process in a linear path. Strategy formulation, which is based on the analysis of the internal and external environment, precedes the strategy implementation. This form of strategy making can mostly be applied in large organizations which are highly controlled and integrated, and which develop their activities in rather stable and predictable environments.
2.2. The entrepreneurial school
According to this perspective, strategy is defined as a visionary process, in which the entrepreneur/CEO establishes a general framework for guiding strategic decision-making. So, visionary and intuitive capabilities of the entrepreneur/CEO play a critical role. The strategy will be established when the ideas of the entrepreneur/CEO are made reality. The entrepreneur/CEO retains close control over the implementation of his visionary strategy. Thus, strategies shift from precise designs, plans or positions as proposed by the previous approach to rather vague visions or broad perspectives, mostly useful in specific contexts (start-up, niche and/or turnaround), developed by the forceful leader (Mintzberg and Lampel, 1999; Verreyenne, 2005)
2.3. The cognitive school
This approach conceives strategy formation as a mental process being developed in people’s minds as frames, models, maps, concepts or schemas (Mintzberg, 1990). Accordingly, cognition as information processing, knowledge structure mapping and concept attainment become important for strategy-making. Cognition is used to construct strategies as creative interpretations of reality. Thereby, the strategy process is also developed according to the experience of the decision maker and his past subjective knowledge. Great importance is
10 attributed to qualitative data such as managerial experience and trial-and-error techniques are applied.
2.4. The learning school
Within this descriptive approach to strategy formation several views can be found. The so-called incremental perspective describes it as a learning-by-doing process. Thus, over time, as the environment changes, successful emergent strategies are retained, while other inappropriate strategies are eliminated. The dynamic capability perspective is focused on the development and improvement of distinctive capabilities, highly difficult to imitate or replicate by other competitors, on which a firm’s strategy can be better sustained. In such a combined learning-based and dynamic approach to strategy-making, strategists can be found throughout the organization and strategy formulation and implementation actually intertwine.
2.5. The power school
The political perspective views the strategy formation as a negotiation process among different interest groups or stakeholders, both internal and external to the organization, each with their own goals and objectives. According to this approach, the strategy-making process is mostly rooted in power (Mintzberg and Lampel, 1999). One political orientation, micro-power, sees the development of strategies within the organization as essentially a political process, involving bargaining, persuasion, and confrontation among internal actors who divide the power. Another orientation, macro-power, views the organization as an entity that uses its power over others (partners in alliances, joint ventures, and other network relationships) to negotiate collective strategies in its own interest.
2.6. The cultural school
Under this perspective, strategy formation is seen as a social process rooted in culture, a system of shared values and norms, whose influence in discouraging significant strategic change can
11 sometimes be relevant. Thus managers may be influenced by a dominant organizational culture, based upon common interest and integration, at determining their firm’s strategy. This cultural frame of reference can have important implications for strategy formation as it enables decisions to be made in a way that makes sense, and provides a guide to appropriate behavior.
2.7. The environmental school
Under this perspective, strategy-making becomes a reactive response to the different demands and conditions imposed by the organizational environment, which becomes the central actor in the strategy-making process. A number of different orientations can be included in this category. The contingency theory considers which responses are expected of organizations facing particular environmental conditions, whereas population ecology claims severe limits to strategic choice. Also, institutional theory is concerned with institutional pressures faced by organizations. Bailey et al. (2000) captured these ideas under the banner of the enforced choice perspective which views strategy formation as a passive, reactive process to the environment. Many environmental factors have an influence on the organization in such a way as to encourage the adoption of those organizational structures and activities most suited to that environment. This reactive strategy-making process is aimed at obtaining both co-ordination and adaptation with an environment that is highly dynamic and complex. It is also most commonly seen in situations where the organization is a still relatively small and therefore has more impact from environmental factors.
2.8. The configuration school
Following the premises of the Configuration School earlier characterized by Mintzberg (1990), this more integrative approach sees organizations as configurations – coherent clusters of characteristics and behaviors. It integrates the claims of the other different approaches to strategy formation through the positioning of each configuration, in effect, in its own place. Accordingly, planning-analytical approaches might be more useful under conditions of relative
12 environmental stability while other approaches (entrepreneurial, political, cultural, environmental, etc.) could be found under more dynamic circumstances of start-up and turnaround. The configuration school is then concerned with the transformation of organizations from one state to another.
In summary, the prescriptive schools are mostly concerned with stating how a firm’s strategy formation process should be, actually conceiving it as the result of a highly rational, formal and intended process. The descriptive schools on the other hand (entrepreneurial, cognitive, learning, political, cultural and environmental) are focused on examining the manner in which the strategy formation process actually proceed in reality. Lastly, the configuration school serves as an integrative perspective where ideas from multiple schools can be combined. The focus here is on the management of these configurations and the transformation between different states.
2.9. Decision-specific characteristics
The strategic decision making process (SDMP) is influenced by numerous factors. Among others, these consist of the environmental and internal context, the personal attributes of the decision makers, and lastly the decision-specific characteristics (Elbanna and Child, 2007). The influence of the decision-specific characteristics on the strategy decision process is found to be significant by multiple studies (e.g. Papadakis et al., 1998; Elbanna and Child, 2007).
2.9.1. Decision importance
Not all strategic decisions can be made with equal time, attention and resources from managers. Therefore concessions have to be made by managers in dealing with these constraints. Managers will be particularly careful and systematic when making decisions crucial to their firm’s future. Papadakis et al. (1998) found that the perceived magnitude of impact, alongside other specific characteristics, has a significant influence on the variation of
decision-13 making behavior. The magnitude of impact is composed of eight variables, namely the impact on (1) profit, (2) quality of products/services, (3) total production, (4) cost, (5) sales, (6) market share, (7) call for changes in existing programs and (8) organizational adjustment required to serve the decision. They found that these factors are positively associated with several strategic decision process characteristics. These factors mainly and positively influence the rationalization, financial reporting, decentralization and lateral communication of the decision process. The first two process characteristics are highly similar to the notions and premises of the prescriptive schools. The latter two are more closely related to the notions and premises of the learning and cultural schools. These findings are concurrent with the research done by Elbanna and Child (2007a) who found that the variance in decision rationality can be significantly explained by the decision specific characteristics, among which decision importance. Contrary to the above, a study from Dean and Sharfman (1993) found no relationship between decision importance and the rationality of the SDMP. The rationality of the SDMP can be connected to the notions and premises of the prescriptive schools as explained earlier.
Hypothesis 1: Decisions that are more important to the organization show more use of the notions and premises of the prescriptive, learning and cultural schools in the strategic decision making process. Ceteris paribus, decisions low in importance to the organization show more use of the notions and premises of the entrepreneurial, cognitive, and power schools.
2.9.2. Decision uncertainty
Uncertainty refers to the specific strategic decision, and not the organizational environment in general (Dean and Sharfman, 1993; Elbanna, 2011). Uncertainty is faced when there is a lack of clarity about cause-effect relationships, an inability to predict the likelihood of some future state or event which would favor one alternative or another, and a lack of predictability of decision outcomes (Dean & Sharfman, 1993: 592). Decision makers have to deal with these
14 problems when making a decision. There are two streams of reasoning on how this impacts the decision making processes. First, uncertainty is seen as the gap of information between what somebody has and the information one needs to perform a task (Dean & Sharfman, 1993). Managers will therefore need to engage in more extensive searches for information. This will increase the rational and analytic processes in the SDMP for filling this information gap (Bourgeois & Eisenhardt, 1988; Elbanna & Child, 2007). Moreover, the uncertainty of the information raises possibilities for different interpretations. Therefore, political activities will increase as managers have to find consensus between their different opinions (Lyles, 1981; Papadakis et al., 1998).
Another stream of research sees decision uncertainty as a mystery which cannot be resolved by rational processes. They argue that organizations try to avoid uncertainty, rather than reducing it through analysis, and that rationality is only sensible when the outcomes of decisions can be understood. Instead, managers rely on their intuition and experience to make strategic decisions with high uncertainty (Dean and Sharfman, 1993). This is in line with Papadakis et al. (1998), who also found that high decision uncertainty leads to more intuitive processes and use of less formalized rules.
The first perspective shows similarities with the notions and premises of the prescriptive and power schools. The latter perspective does so with the entrepreneurial, cognitive and learning schools. Therefore the following hypothesis is formulated:
Hypothesis 2: Decisions that are high in uncertainty will show more use of the notions and
premises of the prescriptive and power schools when this uncertainty is seen as an information gap. Decisions that are high in uncertainty will show more use of the notions and premises of the cognitive, entrepreneurial and learning schools when this uncertainty is seen as a mystery.
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2.9.3. Decision motive
The way decision makers interpret strategic issues influences the subsequent actions they will take (Ashmos et al., 1998; Papadakis et al., 1998). Dutton and Jackson (1987) proposed that strategic issues are frequently interpreted as either threats or opportunities. Issues are seen as threats when decision makers believe there is pressure to initiate action, there is limited control over the issue, there are constraints in their freedom in resolving the issue, and where they believe that failing to act could have a negative impact on the organization. Opportunities can be described as constituting the opposite (Dutton and Jackson, 1987; Jackson and Dutton, 1988). The categorization of the issue may determine important elements of the subsequent decision making processes, such as who will be involved, what role each participant is likely to play, and the amount of resources allocated to an issue (Dutton et al., 1990).
Several empirical studies support this notion that decision making processes differ, depending on the interpretation of the issue as a threat or opportunity. Mintzberg et al. (1976), Fredrickson (1985), and Elbanna and Child (2007), for example, conclude that the SDM processes were more comprehensive and rational when the issue was categorized as a threat. Papadakis et al. (1999) also found that in response to a threat, the decision making processes showed more comprehensive and rational activities to address the issue. Furthermore, the centralization of authority was also found to increase because (a) top managers believed it was their responsibility to divert threats and (b) middle managers avoided the responsibility of the issue and passed it on to higher management levels. Lastly, they also found that the political behavior of decision makers increased when dealing with threat situations. This can emerge through the increased need for the justification of their actions towards other stakeholders. Papadakis et al. (1999) also found that decision processes may change because of changes in the decision motive.
16 The decision motive is therefore also taken as a significant influence on the decision making processes subsequently used. When issues are categorized as threats, more rational, centralized, and political activities are evident. The opposite can be said for situations seen as opportunities. The following hypothesis is therefore formulated.
Hypothesis 3: Decisions that are seen as a crisis show relatively more use of the notions and
premises of the prescriptive, entrepreneurial and power schools in the SDMP as opposed to situations seen as an opportunity. Decisions that are categorized as an opportunity show more use of the notions and premises of the learning and cognitive schools.
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3. Methodology
To test the hypothesized relationships between decision-specific characteristics and the use of the ten schools of strategy formation, the study investigated strategic decisions made at two Dutch organizations active in the health care industry. The empirical research on the use of the ten strategy schools is limited. Therefore a qualitative approach in this research has been chosen in order to gain a thorough understanding of the strategic decisions made by the sample companies and their related processes. Data was collected through the use of semi-structured interviews. The interviews were transcribed and carefully coded by the researcher.
The following sections will elaborate in more detail on the methodology and analysis. First the research sample is presented. Second, the item development for the interviews is explained. Third, the data collection methods are described. Lastly, the data analysis method is explained.
3.1. Research sample
The empirical setting of this study are two Dutch organizations active in the health care industry. They have been carefully selected due to their unique characteristics. The first organization, referred to as Organization 1, was founded in Amsterdam in 2005. It is a for-profit organization and has seen rapid growth since its start. The organization has grown from thirty employees to more than two hundred in recent years. Most of the employees are aged between 20 and 30 years old, and have a high level of education. Although there are differing roles within the organization, the organizational structure is flat and the power distance is low. The organization operates from an office based in Amsterdam, but most of the work is done on the client’s premises, at home or elsewhere by making use of smartphones and laptops. A first interview was held with one of the team managers, referred to as Team manager 1, to gain a good understanding of the organizational activities and the recent strategic decisions the
18 organization has taken. A second interview was held with the founder-owner of the organization, referred to as Entrepreneur 1, to discuss these strategic decisions in more detail.
The second organization, referred to as Organization 2, was founded in the 19th century and employs over one thousand people in the Amsterdam area. It is a non-profit organization and part of the Amsterdam municipality. The organization is active in many areas of the health care industry, and also has an advisory role in the social and health care policy development of the municipality. The employees are aged between 18 and 65, and come from various backgrounds. There is a clear divisional structure with centralized supporting departments. The hierarchical structure is known throughout the organization and power distance is high. Two managers were interviewed who were involved in the same strategic decisions. The first interview was done with the head of policy development, referred to as Manager A, working for the organization for seven years. He advises the management of the organization and the municipality on all sorts of policy developments. He also has a seat in the management team of the organization, and is chairman of a regional policy development institution. The second interview was held with the business controller of the organization, referred to as Manager B, who has been employed by the organization since 1998. He is concerned with the functional management of the various division the organization has, and advises the management team on the functional developments. The interviewees work closely together and their offices are situated next to each other.
3.2. Item development
This thesis is an exploratory research into the relationship between decision specific characteristics and the strategy formation processes. Until now, only limited similar empirical research has been done. For example Barnes (2002) carried out a case study research on the formation of manufacturing strategy at six small UK manufacturing companies. He utilized a similar theoretical framework and found that the strategy formation process was indeed
19 characterized by ideas from several perspectives. Dean and Sharfman (1996) found that the processes leading to a strategic decision do matter in terms of effectiveness and success for the organization. Mintzberg and Waters (1985) argue that strategy process comprises both decisions and actions.
Taking the above into account, the interview questions were derived from the literature on decision-specific characteristics and strategy process research. A qualitative approach was used by making use of semi-structured interviews. They allow for respondents to give open answers, and describe their answers in detail based on their personal experiences, views and philosophies (Saunders, 2007). Hereby the author was able to gain a rich and deep understanding of the strategic decisions made and the processes used in making the decision. After having made a draft version of the interview questions, the supervisor agreed that the questions covered the theory substantially and gave her advice that the focus in the interviews should be on the second part of the interview.
The interview questions can be found in Appendix I. The first part of the interview consisted of questions regarding the decision-specific characteristics. They were drawn from the literature on strategic decision making (Dean and Sharfman, 1993; Papadakis, 1998). The motive of the decision was measured either as an opportunity or a threat, where the interviewee had to explain his or her perception about the issue. The importance of the decision was gauged by using three questions, regarding the impact on the organization, and the urgency of the decision. Lastly, the uncertainty of the decision was also measured by three questions regarding the predictability of the outcome of the decision, the confidence of the decision maker, and the need for additional information. In total, seven questions were asked to determine the decision-specific characteristics. The second part of the interview consisted of twelve questions regarding the processes that led to the strategic decision. Each question relates to certain
20 elements and ideas from one of the ten schools. The questions were formulated in a way which allowed the respondents to give open answers.
3.3. Data collection
The interviewees were contacted by e-mail and telephone by the researcher. Appointments were made at least one week in advance during the period of May and June 2014. The interviews were held at the office of the interviewee so that he or she would feel comfortable. The final appointments were made by e-mail. In that e-mail, the researcher explained the purpose of the research and the interview, and gave a brief theoretical background on the subject so that the respondent could prepare him- or herself. The first interviewee of each organization was also asked to prepare three strategic decisions in advance. These would then be the topic of discussion in the first and second interview. The reliability of the thesis is increased by having multiple respondents discussing the same subject, and by standardizing the interview process and content (Saunders, 2007). The author tried to guide the interviews in similar ways as much as possible.
The interviews started with a brief explanation of the research and the interview, and an assurance by the researcher that all information would be treated confidentially and on the basis of anonymity. Afterwards, introductory questions were asked about the role of the interviewee in the organization and the tasks he or she is responsible for. Not only did this create a better context for the researcher, it also created an atmosphere of mutual interest and trust. This helped the researcher in obtaining more willingness to share information from the respondent. The rest of the interview concerned the three strategic decisions. The interviews lasted between 60 and 75 minutes, with each decision being discussed for approximately 20 minutes. Following the advice of the supervisor, the first part of the interview questions concerning the decision-specific characteristics were conducted within 5 minutes. The decision process questions were
21 extensively discussed, and probing questions were asked by the researcher to gain more depth in the answers.
3.4. Data analysis
All the interviewees agreed to be audio recorded during the interview. Notes were also taken by the researcher which could help in transcribing the interviews. No parts of the interview were left out in the transcription, resulting in transcribed interviews of between 12 and 15 pages. All transcripts were checked for spelling and grammar mistakes. The names of the organizations and interviewees were altered to provide for anonymous results.
For the analysis, an open coding technique was used in the NVivo 10 software. Each school and decision specific characteristic was given a relevant code which reflected the ideas and notions from the literature. The transcribed interviews were then carefully read and coded by the researcher. Each strategic decision was coded separately so that the answers could be compared with the answers from the other interviewee. Parts of the answers which showed characteristics of the relevant theories were appropriately coded. A second reading of the transcripts was done to make sure no answers had been wrongly coded or had been overlooked.
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4. Results
This chapter will present the results from the analyzed interviews. Each strategic decision by both organizations will be presented separately as the strategic decision is the main focus of the research. For each organization, an overview of the coding results is given together with an overview of the tested hypotheses.
4.1. Organization 1
4.1.1. Decision 1
Organization 1 made the strategic decision to improve the quality of her employees by creating and implementing a new training program. The issue was seen as a chance to enter new markets by qualifying the employees on a higher level. The decision was also seen as very important because the governmental cut backs on the health care industry threatened the original market base of Organization 1.
Entrepreneur 1: “And that is where we saw a chance, we wanted to educate everybody onto a higher level. (…) We saw it as a chance because we already had the knowledge.
The outcomes of the decision were high in unpredictability. Although the necessity of the decision was clear, it was unknown whether the organization could actually expand their markets as a result of the training program. Moreover, the benefits of the training program for the employees were questionable as well, because the average educational level of the employees was higher than the level of the training program.
Entrepreneur 1: “It wasn’t even sure if we would have a public tender. We did not know where it would go.”
The strategic decision making processes show considerable use of the learning, entrepreneurial and environmental schools. The latter can be explained by the environmental boundaries that limit the degree of choice. The decision is seen as a reaction to these environmental boundaries.
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Entrepreneur 1: “Those are the formalities, if we do not have those qualifications we cannot participate in the public tenders. That was the start of the training program, in 2011, when we first thought about creating it. That is when the chance originated.”
The strategic decision making process was further developed by several autonomous decisions made by the entrepreneur. As several attempts at creating the training program failed, he took the decision to start afresh with new people and worked together with them to complete the program. He used his vision as a guideline for them to work with. These findings are in line with the entrepreneurial school were the entrepreneur retains control over the formulation and implementation process by giving a broad perspective to strategic decision.
Entrepreneur 1: “Well I already had an idea about the health care industry, and how we should develop the organization and what we thought about quality. (…) That is the only thing where I can exert control and direction.”
Lastly, the strategic decision making process showed use of the learning school. When the training program was first conceived in the organization, its benefits for the employees were doubtful. Through incremental improvements to the program, performed by the complete management team, it became apparent that the program was viable and it should be utilized. Therefore, parts of the implementation were already intertwined with the formulation as several techniques were tested in the program.
4.1.2. Decision 2
The second strategic decision was the change of the main IT system utilized by Organization 1. In regard to the decision specific characteristics, the decision was seen as a reaction on a chance to improve the quality of the primary services. Furthermore, it was a chance to stay in the front of the rapid IT developments of that time. It had great importance to the organization because the IT system had to be used by all the employees, a good IT system therefore had to be guaranteed. The new system was therefore chosen with much confidence by the
24 entrepreneur. The new IT system was tested and there was little uncertainty in taking the decision.
Entrepreneur 1: “First we wanted to redesign the old reporting system, but it proved to be too costly. Then I started searching for alternatives and during a technology event I stumbled upon the new system. I explored the possibilities of several systems and decided to take the new system because it was the most secure and it could also work as a social network in the organization.”
The entrepreneur had much control in the decision making processes:
Entrepreneur 1: “So I looked at the new IT system, and I said: Now we are going to use this. You can shape it yourself as well, and test if it works or not. And then I just kind of forced it through the organization.”
But sharing the vision behind it was still very important for the strategic decision:
Entrepreneur 1: “So I told them (the employees) that this was the new platform, and good luck with it. But I am so happy I went through with it. I did hold a presentation to convince everybody of my vision and ideas. Otherwise people are simply not going to use it.” 4.1.3. Decision 3
The last issue discussed with Organization 1 was seen as a threat because the reputation of the organization was at stake.
Team manager 1: “There were fraudulent organizations active in the same industry as us. And sometimes we would be compared to them because we did not have anybody under contract.”
It was an important decision to the organization because it would be the first time that people would work under contract for the organization. It also would have a large impact on the organization’s reputation, and on their market share.
Entrepreneur 1: “It does not benefit anyone. Not me, not the client, nobody. Everything only gets more expensive. (…) The only good thing would be that competitors saw us as equals. And that we could participate in the public tenders.”
25 Although important, the decision uncertainty was high. The organization lacked relevant information in making the decision and thereby were uncertain in predicting the outcome of the decision.
Entrepreneur 1: “Yes actually we didn’t know anything. (…) My network only consisted of students, and experts try to make you believe everything is very difficult and important. And they do it for a lot of money too.”
In contrast to the other two decisions made by Organization 1, this decision showed more use of elements from the prescriptive schools. Extensive analytical techniques were used in the decision making process, and the final decision was clearly defined by the cost analysis.
Entrepreneur 1: “I made an Excel sheet with an exact cost analysis. And every time I would optimize that sheet. (…) The trigger to do that was that I had to be able to explain my decision to the external environment. (…) The whole analysis and research which had been made at the time did convince me to take the decision.”
The decision was primarily made by the entrepreneur.
Entrepreneur 1: “I took the decision largely autonomous. When the step comes to go forward you do want everybody to be content about it. But if people did not want it they did not have to sign their new contract.”
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Overview results Organization 1 Decision
1 Decision 2 Decision 3 Tota l 1 : Prescriptive 0 1 3 4 2 : Entrepreneurial 3 6 2 11 3 : Cognitive 1 3 0 4 4 : Learning 18 2 0 20 5 : Power 1 0 0 1 6 : Cultural 1 1 0 2 7 : Environmental 5 0 2 7 8 : Configuration 0 0 0 0
9 : Decision Motive - Opportunity 3 2 0 5
10 : Decision Motive - Threat 0 0 1 1
11 : Decision Importance - High 2 1 2 5
12 : Decision Importance - Low 0 0 0 0
13 : Decision Uncertainty - Mystery 2 1 1 4
14 : Decision Uncertainty - Information Gap
2 0 0 2
Hypothesis 1 + - +-
Hypothesis 2 + + +-
Hypothesis 3 + +- +
+ = supports the hypothesis, +- = partially supports the hypothesis, - = no support for the hypothesis
4.2. Organization 2
4.2.1. Decision 1
Both managers saw the strategic decision to be made as a reaction to a threat for the organization. Concurrently they reported that the foreseen change would have a negative impact on their primary processes:
Manager B: “If you centralize the supporting processes, we feared they would become too distant from our organization and a knowledge loss would occur. Moreover, we feared that we could not support the primary processes as well as it should be.”
The decision importance was also seen as high by both managers, both in urgency and potential impact on the organization. The decision uncertainty was also consistently seen as high by both managers.
27
Manager A: “It was a very important decision for our organization because it would decide under which legal form we would go further. (…)There was also a high time pressure on the decision because it was part of a much larger reorganization and we had to be finished before that moment.”
Both managers reported that in making the strategic decision, the processes from the prescriptive schools were mostly used. The decision making process followed a linear model which started with the problem statement, followed with the analysis of several scenarios, consequently the decision was made and the implementation started. They used thorough analysis of multiple scenarios to evaluate the best option. External parties were invited to contribute their experiences in similar cases so that the project group could better predict the outcome of the various courses of action. At the time of the decision, both managers agreed that the strategic decision was well formulated and clearly defined. During the implementation phase, control and planning mechanisms were used in order to gain the desired results. The decision also showed much use of the power school processes. Because the decision was made by a multidisciplinary team, each individual raised his or her own opinions with their own professional background. As both managers reported, this resulted in much discussion and negotiation activities.
Manager B: “We created a project group to make the decision. Together we formulated several scenarios and determined for each scenario its pros and cons. This resulted in a very large matrix, which we reduced by having a lot of discussions in the project group. In the beginning these discussions were very tense, but after four or five sessions everybody learned to cooperate and the discussions went very well.”
4.2.2. Decision 2
The second decision was seen as an opportunity for the organization, although high in the urgency in which the decision had to be made, it was low in importance and impact on the organization. In one way it meant a market expansion by 5% and the improvement of the
28 reputation of the organization. In another way, the decision gave opportunity to establish the legal constructs concerning the ownership of the organization. In practice most of the activities and agreements were already made and would be unaltered, but the decision set legal boundaries which provided more clarity towards the major external stakeholders, and provided more safety in retaining the achieved market share. Because the organization was the subject of the decision, enough information was at hand to predict the outcome of the decision. Moreover, established trust between the organization and the other stakeholders involved led to a willingness to share information between the decision makers. The managers felt they were making the right choice and that they had sufficient information in doing so.
Manager A: “So actually it was just a cosmetic change for us. Something that happens in the books, but in reality not much changes actually. (…) Eventually we have defined how the agreements should look like because we thought that it was the best solution.”
The processes leading to this strategic decision are mainly from the power, cognitive and learning schools. Especially the power school was dominant in the strategic decision, as a lot of negotiation and persuasion activities had to take place. Both managers reported that during the decision making process, a lot of discussions and meetings took place between the stakeholders. Important elements in these discussions were the mutual trust between Organization 2 and the external stakeholders, and the frequency of contact leading up to the decision.
Manager A: “And that was the big puzzle where we stood for, how can we craft a solution so that everyone is happy and we (Organization 2) also have no problems. And by early constructing a solution and sharing this with the others (…) if you do not neatly introduce it, and prepare it, they would never have made the conclusion that this would be the best solution and be contend about it.”
The work on which the decision was based, show much reliance on the managerial experience of the involved managers, and their creativity in dealing with the reality to find a solution. Although some legal guidelines were described in the early phase, the rest of the
29 details could be filled in by the decision makers involved. They did this on basis of other documents, and used their own experiences, and the opinions of the external stakeholders, to deliver a viable solution.
Manager A: “Much of the work I did myself. I just grabbed an old format and I modified those articles that needed tweaking, based on the discussions I had with the other stakeholders. (…) We had to find a solution that complied with the new law, but which would not change anything in practice. So we were free to decide how we wanted this to take form.”
4.2.3. Decision 3
The last strategic decision that was discussed was the take-over of one of the major services of the organization. The issue was seen as a threat because it would be the end of one of the oldest and most important services of the organization. It would also have a large impact on the organization, because around 20% of the employees would be handed over to the competitor. Moreover, a significant reputational loss would occur because the service was the most well-known product of the organization. The urgency of the decision was moderate, as it was postponed several times over a couple of years. The uncertainty of the decision was low, as extensive research and analysis methods were used to obtain sufficient information and to deliver a very detailed report. On areas where the organization did feel uncertain, they hired the expertise of external parties to minimize this information gap.
The strategic decision making processes show much use of the prescriptive, power and cultural schools. First, the presence of the prescriptive school is explained by the multiple scenario analysis the organization performed. Several scenarios were formulated and their relative benefits and disadvantages were described. For each area of discussion (e.g. the new possible organizational form) a workgroup was formed to research and describe the possible scenarios. Furthermore, the strategic decision process was highly deliberate and followed a
30 clear linear path when the final scenario was chosen. The decision itself then was backed up by an extensive report, which in much detail described every course of action to be taken.
Coincidently, there was a high resistance to the change among most of the employees. All the actors involved therefore had to be active in much consensus building activities. This also influenced the rational and deliberate processes of the decision, as the decision makers felt obliged to the departing employees to ensure their future at their new employer.
Manager A: “The personnel tried to stop the change in many ways. (…)Even the director went down there a couple of times to explain what was going to happen. (…) When the final scenario became more apparent, the real resistance against the change grew rapidly.”
Manager B: “You have to treat your employees correctly, especially to prevent unrest among them. (…) Every employee was treated as a different case, people that were sick or did not feel well with the change, we had to make sure that we worked things out well for them too. It was very important.”
The decision also shows much use of negotiation and bargaining activities, because each party tried to optimize its own interests. Before the decision was taken, many discussions were held between both parties to evaluate the possible scenarios.
Manager A: “Yeah we negotiated almost about everything. For example if the service would remain in their building or not, and who would be responsible for that building. And for how long would we rent that building, and who would pay for it. Or what would happen with our suppliers. We really discussed everything.”
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Overview results Organization 2 Decision 1 Decision 2 Decision 3
1 : Prescriptive 19 7 10 2 : Entrepreneurial 0 1 0 3 : Cognitive 4 2 2 4 : Learning 1 2 1 5 : Power 8 8 8 6 : Cultural 0 0 5 7 : Environmental 0 0 0 8 : Configuration 0 0 0
9 : Decision Motive - Opportunity 0 3 0
10 : Decision Motive - Threat 7 0 3
11 : Decision Importance - High 3 1 4
12 : Decision Importance - Low 0 2 0
13 : Decision Uncertainty - Mystery 2 0 0
14 : Decision Uncertainty - Information Gap 2 0 1
Hypothesis 1 +- +- +-
Hypothesis 2 +- + +
Hypothesis 3 + +- +
+ = supports the hypothesis, +- = partially supports the hypothesis, - = no support for the hypothesis
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5. Discussion
In this section the results from the data analysis will be discussed. Reflecting on the studied literature, each decision from both organizations will be discussed whether they support the hypotheses. Possible explanations for lack of support are given.
The results from Organization 1 mainly show support for the hypothesized relationships between decision-specific characteristics and the strategy formation processes. Decision 1 shows support for all three hypotheses. The strategic decision is characterized by a high importance to the organization. According to Papadakis et al. (1998), decisions with high impact on the organization raise the collective attention, and thus show more signs of lateral communication and involvement from more organizational members. The results show that in Organization 1 the whole organization is involved, because they are aware of the potential impact it can have on the organization and themselves.
Furthermore, the strategic decision was seen as an uncertain mystery. Many factors were unsure and the outcome of the strategic decision was difficult to predict. The primary data shows support for hypothesis 2. The decision was made primarily based on the intuitive processes of the entrepreneur. Dean and Sharfman (1993) also argue that when work is not analyzable, and cannot be understood by rational and deliberate processes, instead managers tend to rely on their own judgment and experience rather than on routines. Papadakis et al. (1998) also point out, though, that the entrepreneur’s avoidance of risk is also a major determinant of decision making. This factor has not been accounted for in the current thesis.
Lastly, the issue was seen as an opportunity by Organization 1. According to the literature, issues categorized as an opportunity show, relative to issues categorized as a threat, more reliance on managerial experience and trial-and-error techniques. This comes from the idea that when facing an opportunity, a manager can only gain on reputation. Also, as the issue
33 is not a threat, managers are less likely to use extensive analytical methods to use as defense in their decisions. The results show the same findings, therefore the third hypothesis is also supported.
Decision 2 on the other hand shows only minimal support for the first hypothesis. The decision was high in importance for the organization so you would expect the ideas and notions of the prescriptive, learning and cultural schools dominantly visible. Instead only small use is made of the culture school, visible in the support building that was needed for the implementation to be successful. The learning school was only mildly represented.
For the second hypothesis, Decision 2 did show sufficient support. Again the uncertainty raised from an unpredictable future which was not analytically describable. Instead the entrepreneur used his own intuition and experiences in making the decision.
The third hypothesis is partly supported by Decision 2. On the one hand, use of the ideas and notions of the Cognitive and Learning schools were found, as expected. On the other hand, the decision shows much use of the processes more related to the Entrepreneurial school. This would be more expected in an issue that was seen as a threat, where the decision process would be more centralized because top managers/CEO’s feel obliged to act. The decision was taken though in the start-up phase of the organization. During these times, the entrepreneur often retains much control over all processes in the organization. According to Mintzberg and Lampel (1999) this may be the reason for the predominant appearance of the Entrepreneurial school in this decision.
The results from Decision 3 gave mixed support for the first hypothesis. The decision was categorized as high in importance, and as expected showed use of rational and deliberate techniques in supporting the decision. Unexpectedly, though, the decision was also autonomously taken by the entrepreneur. As mentioned before, decisions that are important to
34 the organization are likely to attract the attention and cooperation of more organizational members. Again, this mixed support can be explained by the unaccounted factors of organizational characteristics (Mintzberg and Lampel, 1999).
Hypothesis 2 was also only partly supported by Decision 3. The uncertainty in the decision was high because little information was known on how to act and what the outcome of those actions would be. As expected the entrepreneur acted on his intuition in taking the decision, and took the decision autonomously. Contrary to the hypothesis, the entrepreneur also made use of extensive cost analysis methods to back up his decision. This would be more apparent in a decision were the uncertainty was seen as an information gap.
Hypothesis 3 was supported by the findings of Decision 3. As expected with an issue that is seen as a threat, rational and deliberate processes were used to gain as much information as possible to make a well-considered decision which was very clear in its formulation. And as anticipated, the entrepreneur felt the obligation to take responsibility for the decision, resulting in a centralized decision.
The findings from Organization 2 are now discussed. Hypothesis 1 will be discussed first because all three decisions deliver mixed support. Decision 2 was seen as a decision with low importance for the organization. Still the decision processes were highly rational, meaning that the decision was clearly defined and followed a linear path of formulation and implementation. This can be the result of the risk avoiding characteristic of the organization. Both Decision 1 and 3 are seen as important by both managers. Although both decisions accordingly report much use of rational and deliberate processes, there also is a high presence of negotiation activities. These findings are unanticipated but can be explained by the nature of the decisions and the characteristics of the organization. First, the topics of the decisions and the involvement of multiple stakeholders resulted in a natural need for discussions and
35 negotiations. Second, as the decisions had a high impact on the organization, the negotiations involved were crucial for the result of the decision. Third, as said above the organization is characterized by political behavior to avoid risks.
Hypothesis 2 is fully supported by all decisions from Organization 2. The uncertainty at all decisions was seen as a lack of information, but able to overcome by using rational processes. Therefore all decisions show, as expected, rational and deliberate processes in the decision process and a clearly formulated decision as a result. Consistently, bartering and persuasion techniques were also present in all decisions.
Lastly, Hypothesis 3 is fully supported by Decision 1 and 3, but only partly supported by Decision 2.The support found in the first and third decision comes from the expectancy that managers use more rational techniques to support their decision. Moreover, the political activities measured are consistent with the literature because more justification is required from others involved in the decision process. The mixed support by Decision 2 is twofold. First, as expected with an issue categorized as an opportunity the decision process shows use of the notions and ideas of the Learning and Cognitive schools. Hence the decision showed an intertwined pattern of formulation and implementation, and was partly made by making use of creative mind of the involved manager and trial-and-error techniques. On the other hand, the decision showed use of the prescriptive schools as control was exerted by planned meetings and legal boundaries. Therefore much of the processes done were highly rational and deliberate.
The purpose of this thesis was to explore the relationship between the decision-specific characteristics and the strategy formation processes. Only one decision gives support for Hypothesis 1, one decision gives no support and the rest only provides partial support. Hypothesis 2 finds support in four decisions, mixed in one decision, and no support in one
36 decision. Hypothesis 3 is supported by four decisions, and partially supported by the other two. These findings are graphically presented in table 2.
Organization 1 Organization 2 Decision 1 Decision 2 Decision 3 Decision 1 Decision 2 Decision 3 Hypothesis 1 + - +- +- +- +- Hypothesis 2 + + +- +- + + Hypothesis 3 + +- + + +- +
+ = supports the hypothesis, +- = partially supports the hypothesis, - = no support for the hypothesis
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6. Conclusions
The aim of this study was to explore the relationship between the decision-specific characteristics and the strategy formation processes. Based on previous literature, it was argued that organizations can use several processes in dealing with strategic decisions. Moreover, the argument was made that managers tend to overlook certain processes or focus too much on others. To find a pattern herein, it was argued that when making strategic decisions, managers utilize certain processes, dependent on the motive, importance and uncertainty of the decision.
To test these hypothesized relationships, the second part of this study consisted of a qualitative empirical research at two Dutch organizations active in the health care industry. They were carefully selected because of their opposing firm characteristics. Two interviews were held within each organization, and were analyzed by the researcher.
The results show weak support for Hypothesis 1, and predominantly positive support for Hypothesis 2 and 3. This implies that Hypothesis 1, concerning the relationship between decision importance and the use of notions and premises of the ten schools, should be investigated further. The study does contribute to the literature with the findings on the other hypotheses. Decisions which uncertainty is seen as an information gap show more use of the ideas of the prescriptive and power schools. Decisions which are high in uncertainty and seen as a mystery, show more use of the notions and premises of the cognitive, entrepreneurial and learning schools. Decisions that are seen as a crisis show more use of the prescriptive, entrepreneurial and power schools. Opportunities will subsequently show more use of the learning and cognitive schools.
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