2.5 Defining Strategic Decisions

After reading this section, students should be able to …

  • Interdependence of strategic decision along three dimensions

The answer to the question ‘what is and is not a strategic decision’ has been elusive, and controversial. For example, Mintzberg et al. (1976, p. 246) define strategic decisions as those that are “important, in terms of the actions taken, the resources committed, or the precedents set.” This may not be the best way to define strategic decisions, because ‘importance’ is quite subjective if it is not explicitly defined. As mentioned in Chapter 2.3, Leiblein, Reuer, and Zenger (2018) define strategic decisions as those with sharp trade-offs or decision tensions. Leiblein et al (2018) view that the different decision options could be seen as trade-offs or critical tensions facing executives in a firm, involving choices between coherent or complementary sets of activities that define discretely different positions (e.g., Porter 1980, 1985, 1996): for example, whether to differentiate or develop a cost advantage (Porter 1985), whether to explore or exploit (March 1991), whether to make or buy (e.g., Williamson 1985), whether to compete or collaborate (e.g., Hoffman et al. 2018), whether to organize innovation in an open or closed fashion (e.g., Felin and Zenger 2014), whether to invest in a committed or flexible fashion (e.g., Posen et al. 2018).

A more comprehensive view of strategic decisions is to view strategic decisions based on their interdependence along three dimensions, viz. interdependence across contemporaneous decisions, interdependence with decisions of other actors, and intertemporal interdependence (Van den Steen 2017;  Leiblein et al 2018). According to Leiblein et al. (2018), decisions become more strategic due to their interdependence with other decisions along these three dimensions.

  • Interdependence across contemporaneous decisions

Strategic decisions are interdependent with other contemporaneous
decisions faced by the focal firm. Thus, decision-makers should understand the interdependence of one decision choice with other contemporaneous decisions (e.g., Porter 1996, Levinthal 1997). ted decisions. For example, the Lincoln Electric company faced a complementary pattern of decision choices related to internal ownership, internal promotion, high bonuses, flexible work rules, etc., (Berg and Fast, 1975), which were dependent on each other. Similarly, Wal-Mart’s investment in barcode scanners have helped the company gain competitive advantage over its rivals, through its complementary decisions to invest in information systems, logistics, and supplier relations (Leiblein et al 2018). Further, Ikea and Southwest Airlines implemented distinct and coherent sets of interdependent choices (Porter 1996).

  • Interdependence with decisions of other actors

Strategic decisions are those that are interdependent with the decisions of other economic actors. Such actors could be the ones on whom the firm has indirect influence and control, e.g., competitors, cooperators, and suppliers
(e.g., Brandenburger and Stuart 1996, MacDonald and Ryall 2004, Chatain and Zemsky 2011). For example, decisions by Home Depot and Ryanair would have an effect on the decisions made by  Lowes in the homegoods industry and British Airways in the European airline industry, respectively.

  • Intertemporal interdependence

Strategic decisions are those that are intertemporally interdependent
as they guide future choices (e.g., Ghemawat 1991, Van den Steen 2017). Due to this property, strategic decisions should necessarily involve irreversible commitments and sunk costs, resulting in firms considering the benefits of committing vs. waiting. Indeed, according to Van den Steen (2017, p. 2623): “commitment and irreversibility are the only decision characteristics that have been explicitly linked to strategic decisions.”



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