All companies, from start-ups to large accounts, via SMEs, are required to make strategic decisions that aim to achieve the objectives they set for themselves to evolve and to try to grow.
Summary
Business leaders usually make these strategic decisions to determine their organization’s direction.
Strategic decision-making is, therefore, an essential step in the existence of a company since it marks the starting point of a new project that will commit to it over the long term.
Before seeing everything you need to know about strategic decisions in the rest of this article, let’s start by defining the term.
What is a strategic decision?
A strategic decision can be defined as a fundamental decision taken by the leaders of a company or by its management team.
Its objective is to give a new general direction to the company over the long term to ensure its sustainability and growth. This also represents a risk since, in principle, there is no turning back after a decision has been made.
In the process that leads companies to implement strategic decisions, leaders seek, above all, to find answers to ultimately simple but fundamental questions:
- What is the company’s know-how?
- What does the company want to do?
- What kind of products or services does the company need to offer in the market?
- What means must be implemented to achieve the objectives dictated by the strategic decision?
A strategic decision is always the result of a long reflection carried out by the leaders of a company to ensure its sustainability and development, even if other criteria are taken into account during its development, such as the intuition of the leaders. , their values and those of the company, etc.
Why do companies make strategic decisions?
Whether it is to set up in a new market or to diversify its activity, strategic decision-making is, as we have already said, the result of a long reflection carried out by the managers of a company to respond to challenges and ensure the future of their organization.
Here are the main reasons why companies change course and sometimes change their business model:
- Entering a new market (internationalization)
- Develop a recent activity or new products to expand its range (diversification)
- Develop your business through an increased service offering
- Outsource or internalize your activity
- Develop its activity on a new consumer segment
- Refocus on your core business
Suppose the choice between these various reasons is strongly linked to the environment and the company’s market. In that case, it also results from the strengths and weaknesses of the company.
What are the three main characteristics of a strategic decision?
A strategic decision must, by nature, combine three specific characteristics:
1- A strategic decision commits companies to the long term
A strategic decision commits companies and all their components — the management team, employees, collaborators, partners, shareholders, subcontractors, and service providers — over a period of 5 to 10 years.
This long-term commitment will condition the operation of the company, its expected development, and the way chosen to conquer the target market to achieve maximum profits.
Strategic decision-making must therefore consider all the issues and challenges the company will face over the long term.
2- A strategic decision requires the implementation of significant resources
This is one of the fundamental aspects of the strategic decision: for it to be qualified as strategic, a decision must necessarily commit significant resources, both human and financial.
Thus, implementing a strategic decision necessarily involves material or immaterial investment and allocation plans that have long-term financial consequences.
Companies wishing to change course must therefore be sure of having a solid cash flow that will allow them to achieve the objectives dictated by the strategic decision, and this, over several years.
Making a strategic decision, therefore, goes hand in hand with thinking about the return on investment linked to such an approach.
3- A strategic decision is fundamentally irreversible
Since it has, in principle, been carefully thought out, since it fully engages the human and financial resources of the companies, and since it is part of the long term, the strategic decision is, in principle, programmed to be a path of no return.
Thus, companies embarking on such a change of direction must carefully weigh the scope and the basis of their decision because it will generate significant changes.
How to make a strategic decision?
In general, and by nature, decision-making is complex. It is even more complicated when it affects the strategy and direction that a company must follow to ensure its sustainability.
Strategic decision-making is a process that begins with the perception that a decision is necessary for the development of a business.
If the notions of analysis, evaluation, and appreciation should not be set aside to select the best choice or the best possibility to implement, the intuition of the leaders is also part of the criteria which determine strategic decision-making.
Such an approach is often triggered because a company’s managers perceive a situation or experience events of which they have some experience.
With the profusion of variables and data from analyses, instinct, a solid but double-edged human feeling, remains a significant element in strategic decision-making.
Therefore, strategic decision-making requires analysis to know the company’s capabilities, the environment in which it operates, and risk-taking.
The notion of values must also be considered, especially in countries with strong corporate cultures.
Before considering making a strategic decision for their organization, all entrepreneurs should keep the following criteria in mind:
- Strategic decision-making is linked to the objective targeted by the company
- Strategic decision-making must meet pre-established criteria
- Strategic decision-making must match the level of urgency the business faces
On the other hand, the strategic choices must be clearly explained to the shareholders if the company is listed on the stock exchange.
Finally, even if the strategic decision is, in principle, irreversible, it is preferable to have a plan B to turn around if necessary if it turns out that the strategic choice does not bring the expected results.
Strategic decision vs. operational decision
If strategic decisions answer the questions “What are we going to do?” and “What will become of us?” This is the answer to the question “how are we going to do it?”
An operational decision focuses on what exists within the company and is based on internal data. For example, performance indicators will allow management teams to make this decision. Thus, an operational decision is always taken to achieve set objectives.
Conversely, a strategic decision is oriented toward the long term. It is based on external data, such as the analysis of the company’s environment, its strengths, its weaknesses, and the future needs of customers.
In the case of strategic decision-making, leaders, decision-makers, or the management team’s ability to project themselves into the future is essential, while in the case of operational decisions, managers are on the front line to link the different levels of the hierarchy. They must show leadership to mobilize all their teams, from marketing to sales, including production.
It is also important to note that for small businesses, this notion of strategic decision is less visible and concrete, as are the terms “strategic marketing” or “strategy” altogether, because from the moment your means are limited, all your actions are of strategic importance.
Finally, it should be emphasized that strategic and operational decisions must always be consistent, although they are based on different layers.
What methods and tools can help you make informed strategic decisions?
To ensure that your strategic decisions are based on criteria and rational analyses, there are various tools and methods which have the function of helping entrepreneurs and decision-makers to make the right choices and to optimize their decision-making process.
Here are the main ones:
- SWOT analysis (an acronym for Strengths-Weaknesses-Opportunities-Threats) to carry out a diagnosis of the situation of your company
- PESTEL (acronym for Political-Economic-Social-Technological-Environmental-Legal) analysis to understand your business environment
- VRIO analysis (an acronym for Value-Rarity-Imitability-Organization) to study and strengthen your capacities, and in particular, the use of your human, financial, material, and immaterial resources
- Porter’s five forces for gaining competitive advantages (Bargaining power of customers-Bargaining, power of suppliers-Threat of substitute products-Threat of new entrants-Intra-industry competition)
- Competitive and technological intelligence, and more generally, the monitoring of weak signals.