The various musings of Michael Hiles

The Fundamentals of Strategic Decisions

Business leaders are constantly faced with decisions. Most are about more tactical issues like day-to-day operations or shorter range and smaller impact issues. However, from time-to-time, business leaders are faced with making some decision that carries a much deeper impact on the future of the business as a whole.

First, we have to consider the questions, “What is a strategic decision?” and then, “How does a strategic decision differ from other decisions?”

These are the landmark decisions that can literally make or break the company over the long haul. Strategic decisions are things like a change in market conditions, regulatory issues, or the choice to enter (or leave) a business segment.

What Are Strategic Decisions?

Strategic decisions are those choices made that are far-reaching and deeply consequential on potentially many fronts. From an organizational perspective, these decisions typically involve major shifts in direction and the commitment of lots of time and resources. Strategic decisions typically play out over a very long period of time – and also carry significant opportunity costs.

Strategic decisions must be made solely within the context of a long-term view or vision. This vision should also recognize not only the desired end state or result – but also the potential, undesired end states that could result from the contemplated choices or course of action.

Direct-, Second-, and Third-Order Impact

When evaluating the consequences of making strategic decisions, not only do we have to consider the direct, immediate impacts on the various areas affected by the choices (direct) – but also the second-order and third-order of effects of the strategic decision. These second-order and third-order of effects must be viewed in frames of perspective based on desired or undesired effects.

I try to simplify this concept by using a billiards analogy, “When shooting pool, always think three shots ahead”. Essentially, visualizing the balls on the table in such a way that gives you the perspective of what could happen three shots in advance.

Nearly all strategic decisions will be made with a substantial level of uncertainty, especially when objectives must be formulated in the midst of a dynamic – and even sometimes volatile environment. The initial assumptions about the environment, conditions, the actors, resources, etc… may be incomplete or wholly inaccurate.

The complexity of the decision increases the points of connection and effect.

When talking about strategic decisions for organizations, those connection points of impact are both internal and external. The range of potential factors for these kinds of decisions is rarely fully understood – at least to any one participant in the decision process.

The complete scope of potential direct, second, and third order effects of a decision may be so overwhelmingly complex, the most exacting search still misses some amount of key information.

Information Technology Provides A Level Of Information

Obviously, information technology serves to provide a level of input into the decision-making process by feeding data to the executive for the purpose of making a choice about the business. As with all data, it’s fundamentally meaningless without the consideration of context. The frame in which information is actually presented becomes the opportunity to miss something, or to gain new insights.

Financial data, and particularly short-term decisions made in a reactive manner around financial data, doesn’t necessarily provide the roadmap necessary to make the right strategic decisions for the future of a business.

For example, assume that a technology business is facing short-term cash flow issues. Now assume the purely accounting-driven decision is made to cut overhead to show a better cash flow statement.

But what if this overhead is based upon a critical area for the overall, future development trajectory of the company?

The business can, and will likely, be stunted – missing the entire technology window of opportunity.

Having a deeper understanding of the direct-, second-, and third-order of impact to any business decision is a better way to frame the choice. Having a multi-dimensional perspective is exponentially better than the typical, subjective, emotion-driven decisions getting made in nearly every organization at every level. Reactive decision-making out of emotion (typically, fear of loss), is a sure fire way to crash and burn – usually long after the decision was actually made.

Seeing into the future is a valuable skill.

  • How do I know where I should be investing my marketing dollars as they relate to where I believe there’s an opportunity to profit?
  • What is my process for deciding where to place my bets to promote my product or service?
  • What data is meaningful to help me understand my market and my marketing process?

In future articles I will discuss how this relates to making strategic decisions around the alignment of a capital investment into the marketing of an organization.

 

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