Types of Strategic Decision Making Models

Life is made upon the decisions. Individuals, regardless of their age, career, and any other factor, make decisions on almost daily routine. Decisions may have small or big scopes with short term or big term impacts on individuals or group of people. No one can deny the role of decisions, either made by him/herself or someone else, on his or her life.

Similar to human beings, organizations are dealing with the decisions that are made in them every single day. Although all the managers at any level, and even sometimes employees, make decisions, the important decisions including strategic decisions are usually made by senior and top managers across organizations.  Based on the nature of decision and other factors, their lifetimes and their effects may vary. Strategic Decisions are amongst the most important ones that are made in any organization and usually have long lasting effects on the companies. The importance of strategic decisions is undeniable, so it is worth exploring its process and any factor pertaining to it. In this course paper, I endeavor to review the existing literature on strategic decision making process.

Environmental factors and constraints shape the main framework for managers, and most of the managerial decisions are inevitably influenced by internal and external environmental boundaries and constraints. (4) The environment is always changing and the dynamic condition of global brings uncertainty and risks into the managerial decision process. On the other hand, due to time, knowledge and other limitations and restrictions, managers make decisions with uncertain and incomplete information. Some managers use intuition to handle existing uncertainties and deal with organizational problems. According to the Klain, 90% of managerial decisions are made intuitively (Klain, 2004).

Strategic Decision

For defining strategic decisions, it is better to start with definition of decisions in general. Based on the Meriam-Webster dictionary decisions are “conclusions or resolutions reached after consideration.” Based on this basic definition, each decision has 3 main steps: First, identification of need or a dissatisfaction of current situation or; Second, moving towards satisfaction or filling the recognized need; Third, a conscious dedication to implement the actions regarding reaching to the point of fulfillment (Arsham, 2010).(1)

Strategic decisions are the decisions that influence the long-term state of the organization. In general the process of developing and putting into action choices that lead to major organizational changes is called strategic decision making process. (2) Strategic decisions usually bring long-term financial and non-financial commitments to the organizations and it’s usually difficult to reverse the strategic decisions once they are implemented in the organizations. (2)  Therefore, managers for making the strategic decisions, unlike common managerial decisions, use more time and effort and pay more attention (4). Strategic management involves with unplanned, unstructured and complex problems; thus strategic decisions are made under uncertainty (Rutherford-Silvers J., 2008; Dragomir, C., 2012; Stefanescu, R., 2013).

The strategic decisions usually play the bridge role between current and future states of the organization (Papadakis & Barwise, 1998). In addition, the strategic decisions play the remarkable roles in organizational learning processes and managers should handle the evolving conflicts between practical and academic disciplines in the strategic decision making process (Papadakis & Barwise, 1998).

In strategic decisions, managers try to harmonize organization capabilities and resources with the environmental opportunities and threats.(3)  In other words, strategic decisions deal with environment and industry in which the organization operates; tangible and intangible resources which form the organization; and the connection and relationship between these two groups at the same time (4).

Operational and administrative decisions are different from strategic decisions. Administrative decisions are organization’s routine decisions that facilitate execution of the operational decisions. Operational decisions are made upon technical knowledge of employees and facilitate execution of the strategic decisions. (3) For example, moving towards cost leadership strategy managers may reduce the number of workers which is an operational decision and it can be achieved by some administrative decisions. (3)

Strategic Decision Making Models

The best and most effective strategic decision model may vary based on the organization situation, manager’s personality, and some other factors.(4)  For example, if the output of the decision should be implemented by group of people, its decision making process is totally different from the process of the decision which its output can be implemented just by the decider. (4)

There are two main approaches in categorizing the strategic decision making models: 1) based on the number of steps 2) based on the context and application. Both approaches have some similarities and they can be combined together in some situations.

Models of decision-making based on the number of steps:

Series of new contributions on process of strategic decision making have been offered in last decade (Jalal-Karim, A., 2013; Verboncu, I., 2011; Nobrega, C.G. et al., 2009; Wildman, J.L. & Salas, E., 2009; Nooraie, M. 2008; Quintus, J.R. & George, J.M., 2005). Generally, the strategic decision making process starts by recognizing an issue or an opportunity. Although anyone in the organization can find the problem or opportunity, mostly top managers recognize them and try to accurately specify some alternatives to attack them.  According to Cornescu, managers may face some obstacles in accurately defining the issue that is the main subject of strategic decision: selective perception, just considering effects and not paying attention to causes, defining issues based on alternatives and so on (Cornescu, V. et al, 2004).

Strategic decision making models consist of the steps which guide the decider to reach better decisions in any situation. In the categorization of the decision making process based on the number of the steps, different authors and researchers defined different number of steps or stages: 7 step decision making process, 5 step decision making process, 4 stage decision making process or innovative decision making process, 3 step decision making process and etc

Regardless of the decision making process, there is one step which is the same in all of these models: defining the problem or the subject of the decision to make. However, the main feature that discerns the decision making and problem solving is related to the human’s bounded rationality. In problem solving process, thinking and the heuristics play the most important roles, and the specific solution is mostly captured at the end of the process. On the other side, in the decision making process, the decider cannot fully analyzes the situation rationally and emotions cannot be excluded from the process.

Anyhow, in many cases decision making and problems solving are replaceable terms and functions. In addition, since one of the main stages of problem solving process is choosing an alternative to solve the problem, the problem solving can be recognized as one type of decision making. And since in many cases the decisions are made under time pressure, the process of decision making can be defined as one type of the problem solving process. According to the mentioned reasons, many people consider decisions as problems to be solved and problems as decisions to be made. (4)

7 Step Decision Making Process

In this model, the process of decision making has seven steps and the entire model is divided into three main stages which are defining the situation, identifying, and developing the actions (Figure 1).

Lintherland identified 7 steps in decision making process:

1. Defining the problem

2. Identifying and limiting the factors

3. Development of potential solutions

4. Analysis of the alternatives

5. Selecting the alternative

6. Implementing the decision

7. Establishing a control and evaluation system (Lintherland, 2013)

This model of decision making process is used by most of the managers in real world (Lintherland, 2013).

5 Step Decision Making Process

Doyle introduced the 5 step decision making process model (Figure 2) (Doyle, 2012). This model also used in the real world and its stages are:

1. Identifying decision
2. Options examination
3. Gathering information
4. Making decision
5. Implementing decision

In this model, the first step plays a remarkable role. The decider should write all factors and topics that may affect decision and form the decision in different ways till the decision precisely fits the decider’s need and wish. In order to identify the decision accurately, the manager can use the answers to the questions like: What? When? Which? How? What if? and etc. (Doyle, J., 2012).

In second step, “options examination”, the decider should formulate the various scenarios and identify the outputs of the different options and scenarios. In this stage, more information and assumptions around the subject of the decision are recognized.  In order to shaping the framework more accurately and finding missing information, brainstorming with other employees is highly recommended to managers. (4)

3 Step Decision Making Process

Chestnut introduced a 3 step decision making model, the stages of this model are: identification of need or opportunity, building decision components and implementation of decision (Figure 3).

Figure 3 – 3 step decision making model

According to Chestnut, in the identification stage, managers capture internal information and apply statistical and mathematical methods on gathered information and use the ouputs of the statistical methods to make a decision (Chestunt, D., 2013).

Second stage in this model is “building components” stage in which the decider considers all possible combinations of limitations and constrains into their models and assesses the result of each possible option. The final list includes all the possible decisions and the probabilities of their success rate.

The last stage in this model is implanting the decision. In this model, like the 5 step decision model, the support system in the organization plays an important role and it’s crucial to track the outcomes continuously to modify the actions within the organization.

3 Step Decision Making Process

Chestnut introduced a 3 step decision making model, the stages of this model are: identification of need or opportunity, building decision components and implementation of decision (Figure 3).

Figure 3 – 3 step decision making model

According to Chestnut, in the identification stage, managers capture internal information and apply statistical and mathematical methods on gathered information and use the ouputs of the statistical methods to make a decision (Chestunt, D., 2013).

Second stage in this model is “building components” stage in which the decider considers all possible combinations of limitations and constrains into their models and assesses the result of each possible option. The final list includes all the possible decisions and the probabilities of their success rate.

The last stage in this model is implanting the decision. In this model, like the 5 step decision model, the support system in the organization plays an important role and it’s crucial to track the outcomes continuously to modify the actions within the organization.

Strategic Decision Models Based on the Context and Application

There is another categorization for strategic decision models. In this categorization, the models are separated based on their main feature, context or application (5). Some of the most well-known are introduced in this course paper:

1. Rational Model
2. Bounded-Rationality or Behavioral Model
3. Bargaining Model
4. Participative Model
5. Garbage Can Model

1. Rational Decision Making Model

This model, also known as “the rational comprehensive” model, is based upon the famous economic approach in which the ultimate goal of any action or change is maximizing the efficiency of specific criteria by choosing the best option. This model is usually divided into 6 specific steps:

1. Defining goals
2. Recognizing alternatives
3. Examining the consequences of each alternative
4. Making decision based on the specific criteria
5. Monitoring implementation
6. Modifying the initial decision based on the feedback

This model is widely used by practitioners mostly because of its attractiveness and simplicity. This model offers a structured approach to address issue or opportunity and help managers reach the decision. This model overlooks any uncertainty and it is best suited for well-structured and simple problems in predictable industries. Based on its feature, the main application of this model is in technical environment where goals are accurately defined and there is an agreement on the criteria and measurement of goals. For instance, NASA uses the rational model since engineering factors, procedures, and goals are relatively clear and less ambiguous. This model is difficult to use in the organizations which operate in dynamic and political environment. The issues and opportunities in the dynamic environment are complex, therefore the unmanageable number of possible options should be considered before making decisions in this approach.

In addition, the existing complexity and uncertainty in the dynamic environments would also decrease the confidence of the decider in evaluating different alternatives.

2. Bounded-Rationality or Behavioral Model

Herbert Simon, Nobel Laureate, criticized the rational decision making approach and introduced the concept of “bounded rationality” (5-4). According to this concept:

• Humans cannot make fully rational decisions mainly because they can process and consider a little amount of data at the moment.
• Expertise, information, and time in each situation are limited; therefore the comprehensive analysis is very hard and almost impossible in most cases.
• Humans can not consider and recognize all possible limitations and constraints of an issue, thus not all of the possible alternatives are analyzed in the rational decision making process.

In real world, considering the rational limitations the managers usually simplify the problem and restrict themselves to just several main options.  Decision makers usually identify a few numbers of criteria and usually assess the options that have worked for their organization or other similar companies before. Unlike the rational model, the behavioral model does not address just one best solution for a problem. The advocates of this theory believe that managers based on the factors such as managers’ characteristics, organization’s situation, and other factors can find various solutions for their problems. Simon asserted that since all the information is not available for a decider, the managers who use the bounded-rationality model, unlike rational model, seek “satisfaction” for their problems and not “maximization”. (Simon) In other words, this model shows a decider the “good enough” options to meet minimum selected criteria at the decision making time. In this model, the “criteria weighting” plays an important role in making ultimate decision.

3. Bargaining Model

The main application of this model is in the situations where two or more parties engaging in the decision may have conflict of interest. The representatives of the organizations should learn and know the principles of negotiation.  Senior managers select this approach in the strategic decisions which involve tradeoff between different organizations or between different parties within the organization.  In this model, the managers or negotiators seek the mutual benefits or common interests to maximize the chance of reaching to the appropriate decision. The resulting decision should be acceptable by all the involved sides.

The bargaining model is highly used in politics mainly because in this context many active parties are fed from the same financial and non-financial resources and these resources are limited.  However, some argue that using bargaining model in politics can lead to distribute power equally that consequently decrease the effect of power which is sometimes essential in the society, organization, and other communities. The bargaining model is useful for getting multiple views before making decision; and it can help managers make the more sustainable decision.

The bargaining model gives each party involving in the decision a position for reflecting their interests. Bargaining model pays a great deal of attention to the competitors and their actions in decision making process. One of the disadvantageous of this model is its time consuming feature in some cases since parties try to resolve disagreements. Although the interests of all parties are relatively considered in the negotiations, the wishes of the most powerful sides are more likely to be met than needs and wishes of the least powerful parties. In practice, some managers exclude some parties from bargaining model for getting agreements more quickly and saving time, but this approach threatens the success of the resulted decision since some parties may not support the actions pertaining to the decision.  To sum it up, the larger pool of participants in bargaining decision making model leads to better yet more time consuming decisions.

4. Participative Decision Making Model

The bargaining decision making model is expanded and formed the participative decision making model. The participative decision making model tries to bring all the people who directly influenced by the decision into decision making process. This model is known as the most democratic decision making process. However, the participation of people in the process of decision making in this model plays just the “consultation” role and not “deciding” role. In other words, this model provides people the opportunities to bring ideas and information to the table but they do not have real decision making power. Any stakeholder group within the organization may have its own agenda and interests to pursue; therefore in this model, the stakeholders are encouraged to present their key concerns before decisions are made. It is worth mentioning that stakeholder groups are sometimes strong enough to hinder the process of decision making if they are not included in the process of decision making. Participative decision making model can be seen in NATO, United Nations, and other global bodies.

The major disadvantages of participative decision making model are its expensiveness and slowness. Information in this decision making model act as double-edged sword, while the information from different perspectives can clarify various aspects of the issue, the huge amount of unstructured information is somehow a problem for managers. For having successful participative decision model, participants should try to subordinate their own interests in pursuit of common objectives.

5. Garbage Can Model

According to Cohen, March, and Olsen, many decisions are made based on unorganized interactions of agents and opportunities, chance, and the current available human skills and other resources within the organization. (25) This model implies that organizations and managers have dynamic, ill-defined, and inconsistent preferences, and organizations are run on a basis of trial and error. Stakeholders partially understand the processes in the organization, and the deciders act randomly and impulsively. Based on the illustrated framework, Cohen et al. argued that managers within the organizations think of many solutions when they have not faced problems yet. They keep these solutions and use them when the problems occur within the organization. They asserted that: “decisions are dumped in a holding can – the garbage can for future use.” (Refr)

Managers use garbage can model in highly ambiguous environments which called structured anarchies. Cohen et al. argued that deciders are as likely to identify their goals through actions as they are to discover them prior to decision. In addition, they argued that due to existing organized anarchies within the organization some technologies used in the organizations are unclear. Moreover, they argued that managers have loose understanding of goals and means at the beginning. Cohen et al. argue that organizational participants learn through trial and error actions without understanding the causes. They also argued that in most cases the decision making participants come and go into the process constantly and their involvement vary because of their interest, energy, and time (Cohen et al., 1972). Thus, it’s very difficult to recognize who will actually participate in a decision (Cohen et al., 1972).  The garbage can model introduces four streams of randomness: 1) randomness in opportunities 2) solutions 3) participants 4) problems. Therefore, the decision making process is full of randomness and the resulted decision can be selected randomly.  Summarily, Cohen and his colleagues argued that decisions are not the outcome of rational analysis or coalition of powers but rather random events. On the other hand, some scholars argue that garbage can model does not offer a theoretical framework and this is its main disadvantageous and cannot be widely used in real world.

In addition to the mentioned decision making models, the researchers introduced some other models that such as incremental and polis models.