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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. |
