Understanding Managers' Strategic Decision- Making Process

This goal of this paper is to establish a research agenda that will lead lo a stream of research that closes Ihe gap bclwcen actual and normative strategic managerial decision making. We start by distinguishing strategic managerial decision making (choices) from other choices. Next, we propose a conceptual model of how managers make strategic decisions ihat is consistent with the observed gap between actual and normative decision making. This framework suggests a series of interesting issues, both descriptive and prescriptive in nature, about the strategic decision-making process that define our proposed research agenda. Is it possible for managers within organizations to have widely varying, and incorrect, beliefs about market facts? Is it possible that consumers' utility for a product and managers' perceptions (of consumer perceptions) of quality for that product are inversely related? Is it possible that managers react to competitors without considering customer behavior implications or competitors' subsequent reactions? Is it possible that increasing the frequency or quantity of available information to managers about customer response leads to increasingly bad decisions? According to empirical evidence, the answer to all these questions, at least in some instances, is yes.^ It is these fmdings, along with other similarly puzzling examples of managerial behavior, that lead us to believe there is great value in better understanding managers' strategic decision making process. The goal of this paper is to establish a research agenda that will ultimately lead to a stream of research that closes the gap between actual and normative managerial behavior. The core of this paper is a conceptual model of how managers 414 WILLIAM BOULDING ET AL. make strategic decisions that is consistent with the patterns of managerial decisions mentioned above. This framework suggests a series of interesting issues, both descriptive and prescriptive in nature, about the strategic decision making process that defme our proposed research agenda. 1. What is strategic? Our interest centers on the process of strategic managerial decision making. This process is distinct from the often studied consumer choice problem (e.g., selecting a particular brand of toothpaste) or a mundane managerial decision (e.g., where to hold the company picnic). Strategic managerial decisions are typically "messier," i.e., they occur in a more complex environment, are difficult or expensive to reverse, and the outcomes are, to a greater degree, contingent on other individuals' or organizations' behavior. Moreover, strategic decisions often substantially alter (and irrevocably so in the short run) the relationship between the manager's organization and that organization's customers or competitors. One characteristic of a strategic managerial decision that differentiates it from other types of decision making is the particular setting or context. Figure 1 represents an abstraction of this context, in the form of the 3 Cs model. Managers make strategic decisions within an organizational context, i.e., the company, and these decisions affect a number of other players. Moreover, the reaction of these other players normally affects the final decision outcome. These other players include customers (with a further complicating factor that the company's customer is often a channel intermediary that resells to an end customer) and competitors (with a complicating distinction between current and potential competitors), as well as broader publics such as society, regulators, and investors (i.e., the "world"). Thus, the viability of managers' strategic decisions depends in large part on managers' knowledge about the current status and probable reactions of their company, competitors, customers, and broader publics. 2. Overall conceptual framework Figure 2 provides our conceptualization of how a manager makes decisions within this strategic context. One should view the model in Figure 2 as completely nested within Figure I. The key features of our model are (1) the decision trigger mechanism, (2) the manager's overall mental market model, which includes decision rules and mental models of market and context response, (3) the decision, (4) the actual market response function, (5) the recognition that context (i.e., the elements delineated in Figure 1) is pervasive in the decision-making process and can interact with any of the elements of Figure 2, and (6) that learning occurs from outcomes of the decision process. We briefly discuss these components to provide an overview of the model. UNDERSTANDING MANAGERS' STRATEGIC DECISION-MAKING PROCESS 415 Figure I. The strategic context for managerial decision making 2.1. Elements of the framework Strategic decision making requires a trigger to start (he process. There are many possible triggers, such as an observed decrease in sales, a new product entry by a competitor, a request for action from a higher level manager, or simply a regular planning cycle. In addition, the outcome of a prior decision could itself trigger a new decision making process. The heart of our framework is the individual manager's mental model of the context and market responses, represented by the functions ^,+ i = fi{X,, ^,) and 416 WILLIAM BOULDING ET AL.