1.1 Introduction to Strategic Decision-Making: Definitions and Traits
Historically, strategic management has been conceived by its founding fathers as a holistic and integrative area.
Chandler (1962) defined strategy as “the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals” (13). A more detailed elaboration of the contents of strategy is found in the definition proposed by Andrews (1980), who defines strategy as “the pattern of decisions in a company that determines and reveals its objective, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of businesses the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities” (18). In this definition, strategy is acknowledged to encompass both the growth strategy for domain-definition and the competitive, or domain-navigation, strategy for positioning at business level (Zollo et al. 2018). Hofer (1975) was the first to propose this hierarchical classification of strategy, distinguishing between the following:
- Domain-definition strategy, which “refers to the organization’s choice of domain or change of domain” (Bourgeois 1980, 27), and
- Domain-navigation strategy, defined as the set of “competitive decisions made within a particular product-market (e.g., industry), or task environment” (Bourgeois 1980, 27).
Strategic decision-making may be outlined as a peculiar type of the more general concept of organizational decision-making.
An organizational decision is defined as “a specific commitment to action (usually a commitment of resources)” (Mintzberg et al. 1976, 246) and is the result of a decision process, described as the “set of actions and dynamic factors that begins with the identification of a stimulus for action and ends with the specific commitment to action” (Mintzberg et al. 1976, 246).
Broadly speaking, organizational decisions are characterized by different degrees of complexity and uncertainty and may be distinguished into programmed and unprogrammed decisions.
- Programmed decisions are repetitive in nature and, typically, problem -solving is based on existing procedures that provide clear criteria for performance valuation. Information on organizational conditions is available and alternative courses of action can be easily identified.
- Unprogrammed decisions are new and hence not based on any existing procedure: the lack of any previous experience with the “focal problem” makes it difficult for the organization to identify both criteria and alternatives, which leads to a greater degree of uncertainty. The most frequently occurring category of unprogrammed decisions is strategic decisions.
According to Mintzberg et al. (1976), it is possible to single out three main types of strategic decisions as a function of the nature of the conditions that elicit the decision problem:
- Opportunity decisions, that is, decisions that are voluntarily initiated to improve a situation that is already secure;
- Problem decisions, that is, decisions that are evoked by pressures; and
- Crisis decisions, that is, decisions that are evoked by a severe situation that demands immediate actions.
Strategic decisions may be distinguished from other organizational decisions for a number of characteristics.
First, they are extremely relevant choices that build the backbone of a firm path and courses of action and are inherently ambiguous due to their lack of structure (Mintzberg et al. 1976). Being unstructured, strategic decisions imply unstructured decision processes, that is, “decision processes that have not been encountered in quite the same form and for which no predetermined and explicit set of ordered responses exists in the organization” (Mintzberg et al. 1976, 246). The “unstructured” attribute implies that strategic decisions are characterized by novelty, complexity, and open-endedness.
Second, strategic decisions involve the commitment of a huge volume of resources (Chandler 1962; Shrivastava and Grant 1985) and have pervasive organizational effects: strategic decision-making lies at the core of the alignment between the firm and the environment (Bourgeois 1980) and is strongly interconnected with structure (Burgelman 1983). Strategic decisions therefore have a major influence on organizational direction and structure (Shrivastava and Grant 1985), thus affecting a firm’s health and survival (Eisenhardt and Zbaracki 1992), and setting important precedents (Fredrickson and Iaquinto 1989).
An additional peculiarity of strategic decisions relates to their temporal nature in terms of both frequency of occurrence and time orientation: these decisions, indeed, do not represent routinary decisions and are rather infrequent (Eisenhardt and Zbaracki 1992) and have a long-term orientation (Chandler 1962).
Broadly speaking, two dimensions play an essential role in decision-making: beliefs about cause-effect relations, that is, guesses about future consequences of current actions, and preferences/desirability of possible outcomes, that is, guesses for future preferences for those future consequences (Thompson 1967; March 1978). March (1978) suggested that the complexity of guessing future possible outcomes lies at the core of theories of choice under uncertainty, while complications in terms of anticipating future preferences are emphasized in theories of choice under ambiguity. The problem with strategic decisions is that they are characterized by both uncertainty about future outcomes and ambiguity about future preferences. Indeed, faced with a strategic decision, the firm has little knowledge and understanding of the decision situation, which leads to the difficulty of identifying an unambiguous list of factors that may produce a given outcome. In addition, strategic decisions are characterized by ambiguity, because preferences may change over time and new emerging preferences may replace the currently anticipated ones, for instance as a consequence of the outcomes from actions taken (March 1978).
General models of decision-making suggest that in framing decisions, two dimensions are usually taken into account, more or less consciously: the desirability of potential outcomes and the probability of such outcomes, both of which are connected with risk evaluations. In their proposed integrated model of decision-making in risky organizational contexts, Sitkin and Pablo (1992) argue that risk propensity and risk perception have critical mediating influences on risk behavior. In particular, while risk propensity, that is, the cumulative tendency to take or avoid risks, affects considerations of risk acceptability, risk perception— that is, an individual’s assessment of the risk implied in a situation—affects the estimates of risk extensiveness and controllability as well as the degree of confidence about estimates (Sitkin and Pablo 1992).
Strategic decisions are therefore characterized by the risk of not attaining the expected outcomes, which, though inherent in any decision, is particularly relevant in the context of strategic decision-making, due to its peculiar characteristics in terms of resource requirements, organizational effects, and temporal dimension.
1.2 Theoretical Foundations of Strategic Decisions
Over the decades, the interdisciplinary interest in organizational decision-making has nurtured a long history of discourse on the topic, resulting in the development of diverse theoretical frameworks.
In the subsequent sections, the theoretical paradigms that have in different, yet significant ways contributed to the conceptual evolution of the contents and dynamics of decision-making within organizations will be presented.
The aim of the sections that follow is far from being an exhaustive compendium of theories on decision-making: the attention is rather directed to those perspectives that have laid the foundations for the development of our understanding of both organizational decision-making processes and contents and the role of the human agent.
The narration begins during the 1940s with functionalist social theory, or structural functionalism, as a theoretical amphitheater from which both an epistemological and a conceptual evolution may be best appreciated.
1.2.1 Functionalist Social Theory
During the 1940s, the prevailing theoretical paradigm in organizational studies was functional social theory, with Durkheim, Spencer, Parsons, and Merton as its founding fathers.
Functionalism adopts an organicistic view: society is envisioned as an organism, where institutions—intended as formal organizations—play the role of organs. The existence of the “formal” attribute is justified as long as institutions fulfill a specific function that contributes to the stability of the whole system.
Organizational studies in the functionalist tradition were concerned with ...