Strategy

• read the narration column first
• then do the exercises

Reading list

You do not need to consult all these books. If you can find one in your local library, concentrate on that author.

• John Foden, Paid to Decide, London Business Books 1991
• Ellen Van Velsor, Jean Brittain Leslie, John W. Fleenor, Choosing 360. A guide to evaluating multi-rater feedback instruments for management development, Greensboro, N. C. Center for Creative Leadership 1997

1. Have you taken any strategic decision yourself - in your own life or work?

1. What was the uncertain future factor?
2. How did you come to the decision you took?

narration

1. 1 What does ‘strategy’ mean?

Strategy involves adopting flexible future options, depending on uncertain future developments.

Decisions in life concern the future.

It is relatively easy to take decisions if we know for sure what is to take place. Suppose we are in India and we have to travel from Dehra Dun to Mumbay. We can then without any difficulty take the decision
(i) to take the Express that goes froth Dehra Dun to New Delhi ;
(ii) to stay in New Delhi for one day ;
(iii) to start on the journey from New Delhi to Mumbay on the day that follows.
Given the fixed timetable of the railways, we can then arrange for all the future activities: buy the tickets in the two expresses trains, and arrange accommodation in both New Delhi and Mumbay.

But it may be that: there are uncertainties regarding the journey. Recentlt there have been communal riots in New Delhi which may well cause all train services to be cancelled. We do not know whether the services will be normalized by the time we intend to travel. In such cases decisions become more complicated. They. will involve calculation and risk, because they have to take an uncertain future into account.

The concept of strategy fits into the context of change.

Originally strategy denoted the art of foreseeing battle in advance and arranging the troops in such a way that the situation would leave the best options to the strategist, whatever the opponent might decide to do. In modern terminology the term has been extended to all fields where it necessary to take decisions that involve uncertain future elements. Business, politics and modern warfare have developed highly polished techniques of strategy.

Taking the example of the daily paper, suppose there are two more future uncertainties: there are plans to launch a rival paper which could ‘steal’ part of the readership & a major advertiser threatens to switch his business to television which will mean loss of advertising revenue.

• How do two extra uncertainties complicate the calculation? How many possible combinations of future outcomes can you foresee?
• Does such complexity make a strategic decision impossible?
• Could you formulate an imaginary strategic decision that would take all three uncertainties into account?

1. 2 Using a ‘pay off’ matrix

Let us take a simple example. The management of a daily paper sees the possibilities of increasing the number of pages of the daily by four and raising the prices by two cents. It is foreseen that this will enhance the circulation and thus also the cost advertisements will go up. There will be an all-round gain, even after deduction of the special expenses that will have to be made to increase production.

There is, however, an uncertain element in the future. The government is considering raising the tax on paper considerably. It is not known whether this new law will come through or not. If it does, it will no longer pay to have extra pages, in fact there may be losses.

The management could, ofcourse, in case the law comes through, switch back to a smaller-size edition. This switch back would imply certain losses.

What decision should be taken?

It should be noted that the decision must foresee the future and must already lay down now what will be done, whether the law comes through or not.

Step 1. List all possible events

There are eight possible events, which we .will characterize with certain letters : I (increased edition), N (normal edition). In between the two letters which indicate these alternative possibilities, we will put.whether the law is passed (p) or not (n).

These are the 8 options:

1. N (n) N. Keep the edition normal. If the law is not passed, keep it normal.
2. N (n) I. Keep the edition normal. If. the law is not passed, increasethe production.
3. N (p) N. Keep the edition normal. If the law is passed, keep it normal.
4. [N (p) I . Keep the edition normal. If the law is passed, increase the production.]
5. [I (n) N. Increase the edition. If the law is not passed, switch to normal.]
6. I (n) I. Increase the edition, If the law is not passed, keep the increase.
7. I (p) N Increase the edition. If the law is passed, switch back to normal edition.
8. I (p) I. Increase the edition. Even iff the law is passed, keep the increased edition.

It will be seen immediately that not each of these eight theoretical possibilities will have the importance. No person in his right senses would follow option no. 4 (N (p) I) or option no. 5 (I (n) N), but for the sake of completeness we can leave them in.

Step 2. Calculate each possible outcome

Our next step is to calculate what our gains or losses would be if any of these eight alternative courses of events were to happen. For example, if option 7 is followed (Increase now, but if the law is passed, switch back), then the overall loss will be $ 100,000.

If we calculate all the eventual gains or losses we might get this simplified survey:

This kind of survey is called the ‘pay-off matrix’ as it indicates which option would eventually ‘pay off’.

Now it does not take much thought to see which decision the management should take in this case.

N (p) I would be mere loss. Keeping the edition normal whatver happens (N (n) N and N (p) N) brings neither gain nor loss. Keeping the edition normal until it is known that the law will not come through, will only bring $ 200,000 and that conditionally (N (n) N).

The management will take the following strategic decisions:

1. Increase the edition now
2. If the law is not passed, maintain the increase. This will give a total gain of $ 400,000 in the period under review. (I (n) I)
3. If the law will be passed, switch back to normal. This will at least have brought a gain of $ 100,000. (I (p) N).

The above example shows the essence of a good decision. It is based on facts. It enumerates and tries out all alternatives. It determines now what will be done in the eventuality of a possible future event.

Imagine you feel attracted to three different men - each with their strong and weak features. You do not know which one you should marry?

• Should you just let your heart speak, or would your choice be a strategic decision?
• On what values would you rate them?
• Do you find the use of ‘strategy’ in relationships unethical?

4. 3 An eye on the future

In today’s world we cannot afford to ignore the future. ‘Playing it safe’ by doing nothing often amounts to risking large losses. Taking no decision at all is, in fact, also a decision.

For the example worked out in the previous section, taking no decision reduces action to N (n) N and N (p) N, which is, in fact, a decision.

Supermarkets in rapidly expanding cities

Let us study this is in another example. The continuous migration of labour into the cities of a certain country makes it more than likely that the city will increase in the same proportion for some years to come. It is foreseen that many of the new settlers will be in due course become shoppers and consumers. To make everything even more certain, suppose we have official policy backing expansion. The government’s five years’ and ten years’ plans contain programmes for increasing the industry of the city very rapidly.

The management of a supermarket chain in such a city is aware of the need for buying ground in view of the future shops that are bound to be in demand after ten years. Now land is still relatively cheap. Within a matter of years the price may jump by leaps and bounds.

However, it is not certain in which direction the town is going to expand. Buying a plot of ground in a place which will later be miles away from the town, does not seem to be wise.

What to do? The firm’s planning director entrusts a small team of specialists with the task of advising her on the matter.

The team might submit the following report: there are five sites outside the city that would come into consideration as prospective plots for future supermarkets:
Plot A (two miles to the North-East)
Plot B (three miles to the South)
Plot C (two and a half miles to the South-West)
Plot D (four miles to the South-East)
and Plot E (three miles to the North).

The team reports that it is impossible to foresee yet in which direction the city will eventually expand. It advises the manager to buy all the plots at once, for the simple reason that it will save the firm much money in the long run, whatever is going to happen.

This could be made clear by the following ‘pay off matrix’ prepared by them, in which they calculated the present price of the plots, and the value of the plots in 2015 both in case the plot will fall within the extended city area (E) or not (n) : (we keep the figures low as they represent ‘minimum plots’):

The firm will have to invest $ 2,300,000 now. Even if only one of the plots were to fall within the extended city area, it would save paying large sums in the future: at least $ 3,000,000 (for plot A) or as much as $ 5,500,000 (for Plot E). And it is very likely that two or three plots will fall within the city extension. The amount saved will then be really worthwhile.

The firm is therefore fully justified in buying all the five plots in a true strategical decision that takes future undetermined factors into account.

Conclusion

We can gain much from intelligent strategical decisions. Many far-sighted decisions of the last decade have already brought innumerable advantages to individuals and institutions.

Many of our decisions will not be commercial, contrary to the examples given above. Then our calculation of possible future losses or gains will cover human values that cannot so easily be expressed in mathematical figures. But the same underlying principles will remain. Not taking a decision is already a decision. Facing uncertain future developments, a wise strategic decision can maximise our gain and minimise our loss.

Solving

Research

Path

Strategy

Image

Face to Face

Consulting