From a decision viewpoint the overall problem of the business of the firm is to configure and direct the resources-conversion process in such way as to optimize the attainment of its objectives. Since this calls for a great many distinct and different decisions, dividing the total decision ‘space’ into several distinct categories can facilitate a study of the overall decision process. One approach is to construct three categories: Strategic-, Administrative-, and Operating decisions. Each related to a different aspect of the resources-conversion process.
Operating decisions usually absorb the bulk of the firm’s energy and attention. The object is to maximize the efficiency of the firm’s resources-conversion process, or, in other words, to maximize profitability of current operations. The major decision areas are resource allocation (budgeting) among functional areas and product lines, scheduling of operations, supervision of performance, and applying control actions. The key decisions involve pricing, establishing marketing strategy, setting production schedules and inventory levels, and deciding on relative expenditures in support of R&D, marketing, and operations.
Strategic decisions are primarily concerned with external, rather than internal, problems of the firm and specifically with selection of the product-mix, which the firm will produce, and the markets to which it will sell. To use an engineering term, the strategic problem is concerned with establishing an ‘impedance match’ between the firm and its environment or, in other words, it is the problem of deciding what business the firm is in and what kinds of business it will seek to enter. Specific questions addressed in the strategic problem are: What are the firm’s objectives and goals; should the firm seek to diversity, in what areas, how vigorously; and how should the firm develop an exploit its present product-market position? A very important feature of the overall business decision process becomes accentuated in the strategic problem. This is the fact that a large majority of decisions must be made within the framework of a limited total resource. Regardless of how large or small the firm, strategic decisions deal with a choice of resource commitments among alternatives; emphasis on diversification will lead to neglect of present products. The object is to produce a resource-allocation pattern, which will offer the best potential for meeting the firm’s objectives.
Administrative decisions are concerned with structuring the firm’s resources in a way, which creates a maximum performance potential. One part of the administrative problem is concerned with organization flows, distribution channels, and location of facilities. The other part is concerned with acquisition and development of resource: development of raw-material sources, personnel training and development, financing, and acquisition of facilities and equipment.
While distinct, the decisions are interdependent and complementary. The strategic decisions assure that the firm’s products and markets are well chosen, that adequate demand. Strategy imposes operating requirements: price-cost decisions, timing of output to meet the demand, responsiveness to changes in customer needs and technological and process characteristics. The administrative structure must provide the climate for meeting these, e.g., a strategic environment which is characterized by frequent and unpredictable demand fluctuations requires that marketing and manufacturing be closely coupled organizationally for rapid response; an environment which is highly technical requires that the research and development department work in close cooperation with sales personnel.
In this sense ‘structure follows strategy’ – the environment determines the strategic and operating responses of the firm, and these, in turn, determine the structure of authority, responsibility, work flows, and information flows within the firm. As new business environment changes, different strategy opportunities became available to business. As firms took advantage of these opportunities and thus changed their previous strategies, operating inadequacies develop which dictated new forms of organization. Alfred P. Sloan in his memoirs has diagnosed one of the major requirements which strategy has imposed on structure: to organize the firm’s management in a way, which assures a proper balance of attention between the strategic and operating decisions.
Such balance is difficult to achieve. In most firms everyone in the organization is concerned with a myriad of recurring operating problems. Management from top to bottom continually seeks to improve efficiency, to cut costs, to sell more, to advertise better. Problems are automatically generated at all levels of management, and those, which are beyond the scope of lower management authority, become the concern of top management. The volume of such decision is great and constant, particularly because of the need for daily supervision and control. In fact one of the major concerns of top management is to avoid overload by establishing decision priorities and by delegating as much as possible to lower managers.
By contrast, strategic decisions are not self-regenerative; they make no automatic claims on top management attention. Unless actively pursued, they may remain hidden behind the operations problems. Firm are generally very slow in recognizing conditions under which concern with the operating problem must give way to a concern with the strategic. Usually when such conditions occur, operating problems neither ceases nor slacken. On the contrary, they appear to intensify.
Conditions in the environment of the last decades demonstrate these competing claims on operating and strategic responses. On the one hand forces of change buffer many firms: technology obsolescence, saturation of demand, rapid obsolescence of products. On the other hand, the very same firms have to meet competition of intensity which they have never experienced before.
The immediate demands on management time and effort raised by such operating problems can readily obscure the fact that the basic ills lie not in the firm but in its environment. Even when a continuous downward trend in profitability or obvious signs of market saturation strongly point to the need to revamp the entire product-market position, a natural tendency is to seek remedies in operational improvements: cost reduction, consolidation, a new advertising manager, and the most popular may be that the demand for the firm’s products is on a rapid decline.
Since strategic problems are harder to pinpoint, they require special attention. Unless specific provisions are made for concern with strategy, the firm may misplace its effort in pursuit of operating efficiency at times when attention to strategic opportunities (of threats) can produce a more radical and immediate improvement in the firm’s performance.
A proper balance of managerial attention requires three kinds of provisions. One is to provide management with a method of analysis, which can help to formulate the firm’s future strategy. The second provision is to provide a method by which management can determine the administrative structure, which will be needed to manage under the new strategy. The third provision is to provide a method for guiding the transformation from the present to the future strategy and from the present to the future administrative structure.
The balance of management attention to strategic and operating decisions is ultimately determined by the firm’s environment. If the demands in the firm’s markets are growing, technology is stable and customer demands and preferences change slowly, a firm can remain successful by focusing its attention on the operating activities, and letting its products, markets and competitive strategies evolve slowly and incrementally. In such environments a majority of firms typically focus their attention on the operating decisions. Strategic decisions seldom find their way into the corporate office, and the strategic evolution of the firm is ‘from the bottom up initiated and implemented through cooperation among the R & D, marketing and production departments.
Only a minority of firms in growing and stable environments are strategically aggressive. These are the firms led by restless and ambitious entrepreneurs who are bent on expanding the firm beyond the limits made possible by its markets. If environment turns turbulent and changeable, and/or demand approach saturation, firms no longer have the option of a dominant concern with operations. Continued success, and even survival, is possible only if management gives a high priority to the firm’s strategic activity.
Sooner or later, a majority of firms have to become vigorous strategic actors. The alternative is to go bankrupt.