4.3 - Strategy and Decision Making
Why and How Businesses Use Strategy
A strategy is simply a plan or approach for achieving a goal. In business, that usually means a plan for gaining competitive advantage, fulfilling the mission, growing revenue, cutting costs, or boosting profits. Strategies look different for every business, shaped by its unique capabilities, its competitive landscape, and its industry.
Two businesses in the same industry can pick very different strategies. A discount grocery chain like Aldi wins customers with low prices, so it keeps costs down with a limited selection and simple stores. A grocer like Whole Foods wins customers with natural and organic products and a nicer shopping experience, so it charges more. Each strategy fits that business's strengths and the customers it's going after.
Businesses gather and track data to define a strategy, evaluate how well it's working, and adjust it when needed. That data typically covers financial performance (revenue, profit, margins, costs), customer behavior and satisfaction, what competitors are doing, and broader market trends. A clear strategy helps mobilize and align resources around a specific goal, increasing the odds of success, and it guides both decision-making and the development of tactics, which are the specific actions used to carry the strategy forward.
Here's how a strategy and its tactics fit together, using a café near a college campus:
- Goal: increase revenue 15% next year.
- Strategy: attract more college students.
- Tactics: a 10% student discount, a booth at campus events, and ads on the social media apps students use.
The café then tracks data like the number of student discounts used each week. If students aren't coming in, it might change its tactics (a different promotion) or rethink the strategy itself. A clear strategy also keeps every department pulling the same way. If a business's strategy is to be the fastest delivery option in town, marketing advertises speed, operations hires more drivers, and finance budgets for both, instead of each department chasing its own priorities.
Deliberative Decision-Making Processes
For big decisions, managers often follow a deliberative process, meaning a careful, step-by-step one, instead of going with their gut. One version is the PACED model, named for its five steps:
- Problem: define the problem to solve or the decision to make, clearly and specifically. "Should we grow?" is vague. "Should we open a second location next year?" is clear.
- Alternatives: list the realistic options (also called courses of action). Keeping things as they are can be one of them.
- Criteria: set the standards for comparing the options, like ROI, startup cost, impact on reputation, or impact on employees. Criteria should be neutral measures ("ROI," not "higher ROI"), since judging the options happens in the next step.
- Evaluation: weigh each alternative against each criterion using evidence, often in a table called a decision grid.
- Decision: choose the best option and explain why, using the evidence from the evaluation.
Decision-making criteria usually include both quantifiable costs and benefits, like the impact on production costs, sales, or profits, and intangible ones, like the impact on reputation or how well an option fits the business's mission and core values.
For example, say a clothing company is deciding whether to move production to a cheaper overseas factory. The quantifiable side includes the lower cost per shirt and the expected change in profit. The intangible side includes how customers might react if the factory has poor working conditions, and whether the move fits the company's core values.
One common financial criterion is return on investment, or ROI, calculated by dividing the additional profit an investment generates by the cost of that investment. Other criteria include market considerations (how an option affects competitiveness and position), operational considerations (impact on supply chain risk, production, and logistics), and organizational considerations (effect on employees, culture, and internal structure).
For example, a bakery is choosing between two investments. A new oven costs $40,000 and should add $10,000 in profit a year, so its ROI is $10,000 ÷ $40,000 × 100 = 25%. A delivery van costs $60,000 and should add $12,000 a year, so its ROI is $12,000 ÷ $60,000 × 100 = 20%. The van brings in more profit in total, but the oven earns more for every dollar invested (25 cents a year per dollar vs. 20 cents), so on ROI alone, the oven wins.
Managers often use strategic frameworks to systematically weigh both internal and external variables for each option and check that it fits with long-term goals. Even with a structured process like this, managers sometimes have to prioritize between conflicting criteria or make decisions with limited or imperfect data, which can still lead to imperfect outcomes.
The strategic frameworks in this course are PESTEL (1.3), Porter's Five Forces, and SWOT analysis (4.4).
Example: Using the PACED Model
Problem: Sol Tacos, a food truck business, sells out most days and has long lines. It wants to grow. Should it buy a second truck or open a small sit-down restaurant?
Alternatives: (1) buy a second food truck for $90,000, or (2) open a small restaurant for $250,000. Sol expects the truck to add $27,000 in profit a year and the restaurant to add $50,000. Sol has $100,000 in cash.
Criteria: ROI, additional profit per year, outside funding needed, fit with the brand, operational risk, and impact on employees.
Evaluation:
Criterion | Second food truck | Small restaurant |
ROI | $27,000 ÷ $90,000 × 100 = 30% | $50,000 ÷ $250,000 × 100 = 20% |
Additional profit per year | $27,000 | $50,000 |
Outside funding needed | None (Sol's cash covers it) | $250,000 − $100,000 = $150,000 loan |
Fit with the brand | Keeps the street food, on-the-go identity | Gives the brand a permanent, visible home |
Operational risk | Can move to where customers are, but depends on weather and permits | Not affected by weather, but locked into a long-term lease |
Impact on employees | 3 new hires with the same skills as the current crew | 8 new hires, including servers and a manager |
Decision: Sol's main goal is to grow without taking on debt, so it should buy the second truck. It has the higher ROI, needs no loan, and builds on what Sol already does well. The restaurant brings in more total profit, so if Sol cared most about total profit and was willing to borrow, the restaurant could be the better pick. This is what conflicting criteria look like in practice: the best choice depends on which criteria matter most, and the profit numbers are only estimates.