Muhammad Hasmi Abu Hassan Asaari, Razli Che Razak

2007 Oxford Business & Economics Conference ISBN : 978-0-9742114-7-3

STRATEGIC DECISION MAKING PRACTICES AND ORGANIZATION PERFORMANCE: A CONCEPTUAL PERSPECTIVE OF MALAYSIAN

ORGANIZATIONS

Muhammad Hasmi Abu Hassan AsaariUniversiti Sains Malaysia

[email protected]

Razli Che RazakUniversiti Utara Malaysia

[email protected]

Abstract

Strategic decision making has been viewed as an important aspect among managers in an organization. Managers are required to make strategic decisions that have an impact on their organization’s performance. This conceptual paper will give an overview of strategic decision making in the context on Malaysian environment.

INTRODUCTION

Organization’s performance has been measured substantially based on their profit achievement. None of any organizations wanted to have losses being marked for their business operations during the given accounting period. Thus managers in the organizations were urged to make profit in the course of business operations, and at the end of their business accounting period. This profit achievement will be the benchmark for the board and top management to recognize their managers’ efforts in making profitable business arrangements and deals.

Behind those profits, managers have to make strategic decisions in charting their organization’s path in achieving its objectives as directed by the board and top management. Managers needed substantial information in order for them to make a sound business decisions. Although, the managers had substantial information prior to make decisions, they may not come up with the right or perfect strategic decision making for the organizations. Thus, these poor business operations will be reflected in the company’s profit and loss account. Nevertheless, managers made decisions affecting the organization daily and communicate those decisions to other organization members (Zaleznik, 1989 and Main & Lambert, 1998 in Certo, 2003).

As stated by Astley and Van de Ven (1983 in Burke and Steensma, 1998) that decision makers have significant influence on a firm’s performance. Thus, the focus of this paper is to evaluate the strategic decision making practices among managers toward organization’s performance. Profile of managers and strategic decision making practices

June 24-26, 2007Oxford University, UK

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will be generated and evaluated. Moreover, this paper will give the insight of strategic decision making practices among managers in the Malaysian organizations. How do mangers exercise their strategic decision making practices in relation to the organization’s performance?

LITERATURE REVIEWS

Managerial FunctionsBased on Henry Fayol’s definition, managerial functions are identified by planning, organizing, commanding, coordinating, and controlling (Robbins and Coulter, 2005). Thus strategic decision makings are involved in mangers during the operations of an organization. Managers have to make thousands of strategic decisions in order to keep their organization in the pace of business.

Due to globalization era, managers have to think and act fast in order to capture all business opportunities. Meanwhile, they also have to eliminate, and if not mitigate, the level of threats toward their organization. Thus, managers’ strategic decision makings are crucial to the survival of the organization. Robbins and Coulter (2005) stated that decision is part of managerial functions. Further, decision making is important in a manager’s job.

Behavioral Decision TheoryNutt (1976) stated that behavioral decision theory (BDT) has faced validity of satisficing and serial search do seem to portray the behavior of decision makers. Moreover, Wildavsky (1966; in Nutt, 1976) stated that decision makers do not know what they want because they do not know what they can get. March (1958; in Nutt, 1976) found that decision making as practiced in organizations is a serial process and that satisficing is used as a decision rule. Conrath (1970; in Nutt, 1976) stated that the decision maker is also influenced by uncertainty; as uncertainty increases, so does search time, care of evaluations, and resources allocated to the search process. Finally, BDT model seems to describe what skillful decision makers often try to do when grappling with complex decisions (Nutt, 1976).

Strategic Decision MakingBy definition, decision making is the process through which managers identify organizational problems and attempt to resolve them (Bartol & Martin, 1994). Crook, Ketchen, and Snow (2003) stated that the purpose of strategic management research is to help find ways to improve their performance. Further, strategic decision makings are those that determine the overall direction of an enterprise and its ultimate viability in light of the predictable, the unpredictable, and the unknowable changes that may occur in its most important surrounding environments. They ultimately shape the true goals of the enterprise (Mintzberg & Quian, 1991).

Pearce and Robinson (1997) underlined the characteristics of strategic decision making as corporate level decisions (greater risk, cost, profit potential; greater need for flexibility,


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and longer time horizons), functional level decisions (implement the overall strategy formulated at the corporate and business levels), action oriented operational issues; short range and low risk. Modest cost; dependent on available resources, and business level decision (bridge decisions at the corporate and functional levels; which is less risky, costly, and potential profitable than corporate level decisions, but more risky, costly, and potentially profitable then functional level decisions).

Tatum et al. (2003) stated that managers make day-to-day decisions, or resolve immediate problems. They also elaborated that managers have different decision styles due to the amount of information, number of alternatives, and attempt to integrate and coordinate multiple sources of input. Vroom (2003) in his study quoted Nutt (2002) on a study of 400 decisions that had been made by manager in medium to large organizations in the USA, Canada and Europe. Surprisingly, half of the decisions failed; either never implemented or subsequently unraveled during the two-year observation period. Nutt (2002, in Vroom, 2003) stated that effective decision making is not merely a matter of decision quality but also of ensuring that the decision will have the necessary support and commitment for its effective implementation.

Nevertheless, all strategic decision making must go through the decision making process in order for managers to come up with a good decision.

Decision Making ProcessDecision makers and managers need to allow themselves to be in the process of decision making. This decision making process will give the opportunity to decision makers and managers to come up with the alternatives, evaluate each alternatives, and select the best alternative or solution to the problem.

Decision making process comprise of the steps the decision maker has to arrive at his choice. The process a manager uses to make decisions has a significant impact on the quality of those decisions (Certo, 2003). Moreover, Provan (1989) stated that people who participate in the strategic decision making process are at a high level of in their organization, are competent, and are reasonably intelligent and articulate. Strategic decision making process can be an is influenced by those major groups in the organization that are most powerful and that a rational consideration of external environmental factors may have little direct impact on how strategies are actually formulated and implemented (Provan, 1989).

Basi (1988) stated that type of decision is a function of administrative level, and the style is a function of organizational culture. Administrative level is classified as institutional or executive or upper level, organizational or managerial or middle level, and technical or lower level. Meanwhile organizational culture is known as paternalistic, bureaucratic, and synergistic.

Meanwhile, Nutt (1976) indicated in his study on the decision making models. He discussed 6 models of decision making of which bureaucratic model, normative decision theory, behavioral decision theory, group decision making, equilibrium-conflict


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resolution, and open system decision making. Nutt (1976) also discussed on the limits and ways to selection the appropriate model for decision making for organization. As such organization performed unique functions; the levels identified were technological or primary level, managerial level, and institutional level. Thus, factors which characterize the decision making environment will stipulate the appropriate model that can be optimally used (Nutt, 1976)

Organization PerformancePerformance of an organization has to be measured at the end of an accounting period. This is the point where an organization, especially the decision makers and managers, will know whether the organization is making profit or loss during that accounting period. Moreover, no organization is willing to accept the notion that they are in a bad shape and loosing. Thus organization with the help of decision makers and managers need to make profit at the end of its accounting period. This profit will be reflected and distributed to their stakeholders. At the mean time, decision makers and managers are accountable on the performance of the organization as they decide collectively.

Most studies indicated organizational performance indicators as the organization’s financial indicators. Literatures spelled out specifically that profitability, return on investment (ROI), return on equity (ROE), growth of net assets, capital structure or leverage, and export sales (Tsekouras et al., 2002; Kotey, 2005; Kannan and Tan, 2003; Skaggs and Youndt, 2004). Moreover, Burke and Steensma (1998) stated that financial indicators derived from archival sources could be used in measuring firm performance. Mahmood and Mann (1993) selected six measures representing the strategic and economic performance of a firm, namely return on investment, return on sales, growth in revenue, sales by total assets, sales by employee, and market to book value (in Lee and Bose, 2002).

Jurkiewicz and Giacalone (2004) stipulated that organizational culture will lead to firm performance. Thus, workplace spirituality such as benevolence, generativity, humanism, integrity, justice, mutuality, receptivity, respect, responsibility, and trust will give an impact on individual workers; and will lead to higher productivity and will improve firm performance.

Lloyd (1990, in Jurkiewicz and Giacalone, 2004) stated that organization high in workplace spirituality outperform those without by 86%. Further, such organizations reportedly grow faster, increase efficiencies, and produce higher returns on investments. This can be triangulated by three areas as such motivation, commitment, and adaptability (Jurkiewicz and Giacalone, 2004).

McNamara, Luce, and Tompson (2002) explored the relationship between the complexity of the cognitive strategic group knowledge structures constructed by TMTs and the performance of their firms. On the other hand, Kang and Sorensen (1999) studied ownership organization and firm performance. They discovered that ownership organization by large-block shareholders and institutional investors had an effect toward firm performance.


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Lee and Bose (2002) conducted and exploratory examination on relationship between IT investment and firm economic performance. They used accounting-based performance and market-based performance in measuring firm’s economic performance. Measurements employed to measure account-based performance are (1) return on assets (ROAA), (2) return on average equity (ROAE), and (3) return on average sales (ROAS). On the other hand, market-based performance will be based on Tobin’s, market value and market rate of return.

THEORETICAL FRAMEWORK

The above theoretical framework will be based on the Behavioral Decision Theory (BDT) model. Manager’s behavior in strategic decision makings will be evaluated based on the factors of external environment, department power, decision approach, leadership behavior, organizational justice, and intuition. These factors will be the antecedents toward organization performance. Moreover, catalyst for this relationship will be decision support systems, organizational structure, and strategic preference point.

Environment FactorsEnvironment or external factors influenced strategic decision makings, and subsequently affected the organization performance. Mangers made strategic decision makings based on the external factors that affect their decisions. As such, Porter (1979, in Pearce & Robinson, 1997) in his famous Five Forces that explained the environmental factors that affect managers’ strategic decision making.

Moreover in Crook et al., (2003) stated that their strategic decision-making concept of competitive edge model needs to evaluate industry analysis, competitor analysis, country analysis, stakeholder analysis, legal and regulatory analysis, and company analysis.

Provan (1989) stated that the organization must deal with an environment that is determined by the strategic decisions of top management. Apart from that, Provan (1989) also listed external environment factors that has an impact on decision making such as Porter’s “five-forces,” regulatory pressures, emergent technologies, and economic conditions.

Internal FactorsProvan (1989) stated that internal organizational factors to be important in influencing the strategy formulation process, but focuses primarily on an objective, rational consideration of internal strengths and weaknesses. Company analysis needs to be considered in the process of strategic decision making (Crook et al., 2003). Further, they stated that company analysis involves internal factors such as resources, capabilities, and performance. Meanwhile, Berman, Wicks, Kotha, and Jones (1999) stated that employee and product safety/quality can help improve firm financial performance.


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Decision ApproachDecision making style of managers can be classified based on their approach toward the problem that they tried to be solved. Barton and Martin (1994) stated that various models of decision style being adopted such as rational model, nonrational model, satisficing model, incremental model, and garbage-can model. Basically, these models are based on the individual manager’s perspective toward decision making. First, rational model suggested that managers engage in completely rational decision processes, ultimately make optimal decision, and possess and understand all information relevant to their decisions at the time they make them. Second, nonrational model suggested that information-gathering and –processing limitations make it difficult for managers to make optimal decisions. Third, satisficing model suggested that managers seek alternatives only until they find one that looks satisfactory, rather than seeking the optimal decision. Fourth, incremental model stated that managers make the smallest response possible that will reduce the problem to at lease a tolerable level. Finally, garbage-can model stated that managers behave in virtually a random pattern in making nonprogrammed decisions. Basi (1988) identified that decision style is influenced by organizational culture; which will lead to decision making.

Leadership BehaviorFamous study on leader behavior by Blake and Mouton (1985, in Barton & Martin, 1994) of Managerial Grid® classified that leader were grouped based on their degree of concern on people and production (i.e. work). The study identified manager’s leadership behavior as:

1. Impoverish management (1,1) – exertion of minimum effort to get required work done is appropriate to sustain organization membership,

2. Country club management (1,9) – thoughtful attention to needs of people for satisfying relationships leads to a comfortable friendly organization atmosphere and work tempo,

3. Authority-obedience (9,1) – efficiency in operations results from arranging conditions of work in such a way that human elements interfere to a minimum degree,

4. Organization man management (5,5) – adequate organization performance is possible through balancing the necessity to get out work with maintaining morale of people at a satisfactory level, and

5. Team management (9,9) – work accomplishment is from committed people; interdependence through a common stake in organization purpose leads to relationships of trust and respect.

Meanwhile, Burke and Steensma (1998) indicated that executive career experiences had relationship to firm performance. Further, their career experiences will affect the leadership behavior. This happened as an executive tenure will determine the way he or she will think and further involved in the strategic decision making.

On the other hand, Winter-Ebmer and Zweimuller (1999) in their study discovered that firm’s pay structure is an important determinant of firm performance. They also stated that wage dispersion or compression may become an important decision variable for a


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firm once employee engage in social comparison. Thus, this wage dispersion factor may affect the manger behavior; and later will affect the firm performance.

So and Smith (2003) indicated that differences in decision makers’ cognitive styles, cognitive abilities and personality are important factors in decision making and performance. Further, the Myers-Briggs type indicator (MBTI) (Myers and McCaulley, 1985 in So and Smith, 2003) is used to determine cognitive styles along two basic dimensions, perception (information acquisition), and judgment (data processing and evaluation). MBTI categories individuals as sensors or intuitors in the perception dimension; and MBTI classifies individuals as thinking or feeling types in judgment dimension.

Rausch (2003) indicated that managers’ leadership roles need consider 8 suggested questions as they develop a plan, solve a problem, meet a challenge, or seek to exploit an opportunity. The questions to be considered are goals (outcome), communications, participation, competence, satisfaction, co-operation, norms, and reviews.

Nicholls (1994) stated that strategic leadership stat is a powerful, visual and conceptual guide to strategic behavior. It focuses the organization on the delivery of value to the customer and highlights the key areas where effort must be continuously directed. Thus, the management of an organization would simultaneously be performing their strategic leadership role and ensuring the competitive success.

Organizational JusticeOrganizational justice in organization has been researched extensively (Cropanzano, 1993; Greenberg, 1993; Colquitt, 2001; Colquitt et al., 2001; and Tatum et al., 2003). Further, Tatum et al. (2003, in Cropanzano, 1993) indicated that organizational justice as the just and ethical treatment of individuals within an organization, and is intimately tied to leadership and decision process. Thus, leaders in an organization are expected to create organizational systems that members perceived as fair, caring, and open (Tatum et al., 2003).

Greenberg (1993) categorized organizational justice as structural and social justice; where structural justice refers to the structural elements of the organization that allow employees involvement in decision making and provide for the fair distribution of incomes. Meanwhile, social justice refers to the employee’s perceptions that the organization openly shares information with tem and cares about their well-being (Greenberg, 1993).

IntuitionIntuitive way of making decision making has been realized by various researchers in the decision making process. They realized that various decision makings were made based on managerial intuitions. Managers are still using their parapsychology of intuition in making decision, although they were provided with ample information. An article by Emerald Group Publishing Limited (EGPL, 2005) stated that good judgment based on knowledge, decision-making based on what is known, is a talent which people charged in


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running organizations have in common and in which they all participate with widely varying levels of success.

Behling and Eckel (1991) in their research indicated that executives should rely more on intuition and less on the systematic analysis long considered being good management practice. They indicated four tenable conceptualizations suggest optimistic conclusions in two of three aspects of decision making. The conceptualizations are personality traits, unconscious process, set of behaviors, and distilled experience of which will lead to intuition. Personality traits, set of actions, and distilled experience maintain the intuitive decision making requires relatively small amount of information. While, unconscious process category suggest otherwise, implying that analytical and intuitive decision making are parallel processes using roughly the same amount of information.

Further, Basi (1998) purported that significant decisions are likely to be intuitive at the executive level. Meanwhile, Majchrzak and Gasser (2000) stated that senior managers made difficult strategic decisions that affect their entire organization; thus they often must rely on management experience and intuition.

Robbins and Coulter (2005) stated that managers do make decisions based on intuition. They will be making decision based on the basis of experience, feelings, and accumulated judgment.

Decision Support SystemsSo and Smith (2003) stated that a major components of any information system is the individuals that supply, manipulate, access and rely on the system. Individual’s information needs and requirements for decision making are the reasons information systems exist.

Bounds, Dobbins, & Fowler (1995) defined decision support systems (DSS) as information systems that use decision rules, decision models, a comprehensive database, and the decision maker’s own insights in an interactive computer-based process to assist in making specific decisions.

Pourvakhshouri and Mansor (2003) stated DSS is a well established area of information system applications, which assists the decision makers to derive an in-time, efficient solution. A DSS may also be defined as an integrated, interactive and flexible computer system that supports all phases of decision making with a user-friendly interface, data and expert knowledge (Fabbri, 1998 in Pourvakhshouri & Mansor, 2003).

Majchrzak and Gasser (2000) indicated that TOP-MODELER© can help managers in overcoming the burden of strategic decision making in their daily business operations. The system also assists the managers to understand their organization structure in gaining closest relationship possible.

Ulvila and Brown (1991) stated that decision tree analysis is the oldest and most widely used form of decision analysis. Managers have used it in making business decisions. On


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the other hand, Heenan and Addleman (1991) proposed that mangers to use multivariate analysis (MVA), the quantitative methods can help to evaluate the complex and intangible factors that influence consumers. Moreover, MVA had been used for application to business problems in consumer packaged goods and services sector.

Organizational StructureBy definition, organizational structure is referred as the specific working relationship among people and their jobs to efficiently and effectively achieve that purpose. Further, the structure is important as it helps people to understand their position and role in the organization’s processes, who they work with, who works with them, to do the company’s work (Bounds, Dobbins, & Fowler, 1995).

Based on Kang and Sorensen (1999), they stated that ownership organization is an important variable from the perspective of sociological and organizational. The ownership organization will have an impact on firm performance as the managers go through strategic decision making.

Burt, Gabbay, Holt, and Moran (1994) studied corporate culture and firm performance. They viewed culture as a control mechanism. In order to do this, a firm needs to have a strong corporate culture that able to clarify a firm’s goals and practices. They discovered that economic performance can be enhanced by a strong corporate culture, economic success results in a strong corporate culture, culture and performance determined each other, and correlation between performance and culture strength is spurious.

Montanari (1978) stated that organization size, technology, or environment was proposed as the single most important determinant of organization structure. Meanwhile, Michailova and Husted (2004) conducted a study on Russian organizations. They discovered Russian organizations practice a highly centralized decision making.

Strategic Reference PointsBamberger and Fiegenbaum (1996) studied strategic reference points (SRPs) or benchmarks to guide strategic decision making with regard to human resource (HR) issues, and how these benchmarks can affect the performance based consequences of such decisions. They discovered that in the context of SRP theory, benchmarking in the HR system may thus be seen as much more than a new managerial tool. Further, managers at the organizational level are continuously comparing themselves against specific internal, external, and time-based targets (Bamberger and Fiegenbaum, 1996).

Moreover, Fiegenbaum et al., (1996) stated that the configuration of selected benchmarks or reference points will have important implications for both strategic choice behavior and firm performance.


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CONCLUSION

Strategic decision makings and managers cannot be separated. They go inline together. Moreover with the organization’s concern on the firm performance, strategic decision makings are considered crucial to managers that manage the organization. They have to make sound decisions in order to ensure the organization that they work with will manage the turbulences of business. Moreover due to the demands of globalization, managers have to make several strategic decision makings in their managerial functions.

Nevertheless, managers are affected with several factors in their strategic decision makings for organization. These factors will directly and indirectly affect their well being of the organization. As such various studies were conducted in looking into various aspects and factors in relation to managers, strategic decision makings, and firm performance.

Some researchers will relate managers with the factors in relation to their strategic decision makings. They studied factors in relation to strategic decision makings and organization performance (Hambrick and Mason, 1984; Byars, 1987; Provan, 1989; Lloyd, 1990; Priem, 1990; Mahmood and Mann, 1993; Barton and Martin, 1994; Bartol and Martin, 1994; Crook, Pearce and Robinson, 1997; Burke and Steensma, 1998; Kang and Sorenson, 1999; Winter-Ebmer and Zweimuller, 1999; Tsekouras et al., 2002; McNamara, Luce, and Tompson, 2002; Lee and Bose, 2002; Kannan and Tan, 2003; Certo, 2003; Roberto, 2003; Ketchen, and Snow, 2003; Rausch, 1996; Vroom, 2003; Foster, Beaujanot, and Zuniga , 2002; Skaggs and Youndt, 2004; Jurkiewicz and Giacalone, 2004; and Kotey, 2005; and Robbins and Coulter, 2005). Further, the above relationships revealed factors as such external and internal environment (Provan, 1989), decision approach (Barton and Martin, 1994), leadership behavior (Blake and Mouton, 1985), organizational justice (Cropanzano, 1993; Greenberg, 1993; Colquitt, 2001; Colquitt et al., 2001; and Tatum et al., 2003), and intuition (Behling and Eckel, 1991; Marjchrzak and Gasser, 2000).

Moderating factors between strategic decision makings and organization performance will be incorporated as such decision support systems (So and Smith, 2003; Bounds, Dobbins, & Fowler, 1995; and Majchrzak and Gasser, 2000), organizational structure (Bounds, Dobbins, & Fowler, 1995; and Kang and Sorensen, 1999), and strategic reference point (Bamberger and Fiegenbaum, 1996; and Fiegenbaum, Hart, and Schendel, 1996). These moderating factors will be the catalyst between strategic decision makings and organization performance.

Unfortunately, there is lack of in-depth on managers’ strategic decision makings toward organization performance in the Malaysian context. This gives an opportunity for this research to be conducted with the intention of building the body of knowledge in the Malaysian business environment. Moreover, the integration of the above factors that influence managers’ strategic decision makings are also lacking. This research will fill the gap of integrating several factors that influence individual managers in their strategic decision makings.


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Muhammad Hasmi Abu Hassan Asaari, Razli Che Razak