The focus of this dissertation is on
the use of information in the strategic decision-making process by executives
in industrial organisations and how these processes have changed in recent
years e.g. under the influence of increased availability of information
resources. The emphasis thereby is on the process, not on the resulting
decision itself.
Decisions taken by executives of large
corporations are mostly of a strategic nature; they are complex, non-routine, cannot be managed easily by existing procedures and have not
previously been encountered in the same form. The strategic issues that are the subject of the decisions we studied involve
considerable change such as strategy development, mergers and acquisitions,
large investments and sometimes disinvestments, new products and new markets,
make or buy options, organisational issues and long-range planning strategies.
Many studies in strategic management
take the position that executives reach strategic decisions after a structured
process of careful consideration of circumstances, alternatives and
consequences. Information on matters such as competition, markets, technologies
and the societal environment affecting the organisation specifies the
implications of the feasible alternatives for the decision to be made and plays a crucial role in obtaining the parameters
of these alternatives. Making decisions presupposes that adequate information
is available that enables an executive director or a board of directors to
reach the best possible decision under the circumstances.
This position
however is not uncontested. In several studies,
arguments are presented claiming that human beings
only have limited cognitive capabilities and can only comprehend and use a
limited amount of the information that is available. As a
consequence, they have to rely on bounded rational processes rather than
rational processes. In strategic decision-making, this leads to the view that
executives reach decisions in a basically unstructured
process accepting ‘satisficing’ instead of optimal solutions. Again another point of view is that in some cases, decisions
primarily based on an intuitive process can lead to equally proper outcomes.
Our research centres on the use of
information because we argue that this is a factor that influences
the structure of the strategic decision-making process. As implied, the
executive that follows a rational approach collects and uses ample information
in a structured decision-making process passing through a number of distinct
phases in time. In this process, information plays an all-important role
throughout. The satisficing executive follows a decision-making process that is based on using a limited amount of information of all
that is available and the decision-making process is less structured. For the
intuitive executive, the exact role of information cannot be determined and the
decision-making process is unstructured as mostly
previous experience and learning constitute the knowledge base for the decision
in an intuitive process. The manner in which information is
used in the decision-making process thus differs in each of the three
approaches to this process. Investigating the role and extent of usage of
information in the process therefore can be a factor in discerning which
approach to the decision-making process is actually followed
by the executives.
The issue of
the substance of strategic management information is seldom discussed or
analysed as such in this context; moreover, in many studies on company
performance, management information is considered a production factor that is
readily available and its accessibility is ‘taken for granted’ in the process.
Over the last few years, resources for management information have increased
with the change of the Internet from mainly a research-oriented system to one
that has additionally become a source of relevant information also for a
business audience by its diverse content. Because of these developments, the
question is no longer whether some required bit of
information is available, but where this item can be found in the shortest
time. Also, new methods have become available for the task of collecting
information in each step of the decision-making process such as preparing for a
case, constructing, documenting and comparing alternatives, thus enabling
faster and more comfortable choices. There is a risk associated with this
increased availability of information, that of being plagued by an overload of
information. There are however several methods to cope with this problem by
proper organisation of the information flow, if needed, assisted by computer
procedures. Equally, checking the reliability of a received piece of
information from an uncertain source is facilitated by the new methods of ICT
techniques, e.g. statistically or by comparison with other data.
In order to be able to draw conclusions
for this study, we have considered several aspects of information requirements
such as the quality, the sources and the actual use of available information
during the process of strategic decision-making.
In the theoretical chapters of this
thesis, we have reviewed and discussed the literature on strategic management
that has an implicit bearing on the structure of the process of strategic
decision-making and a thorough analysis of the different approaches to the
process. This is followed by a similar review and
discussion of the strategic role of management information in the
decision-making process, its value and the advances in computer applications
facilitating the availability of information are indicated. As the objective of
our study lies in the identification of the changed role of information as a
management tool, we gave a short historical overview of the advances and
significance of developments in information and communication technology. We
paid particular attention to the development of the Internet, especially as it
offers new services for the chemical and food industries.
As a result of our theoretical discussion, we have
formulated four hypotheses that have been tested in the fieldwork for this
research. Hypothesis 1 refers to the decision-making process: ‘strategic
decisions by executives are reached in a rational, well-structured process with
the purpose to come to the best possible results under the conditions that
apply in each specific case’. Hypothesis 2 states that ‘in answering a specific
strategic issue, executives that follow a rational process, will collect all
feasible information considered to be supportive for this process’. Hypothesis
3 is about the quality of the information that is used: ‘before it is accepted as relevant, executives thoroughly check (or
have checked) all information that is believed to be suitable as a supportive
resource for the decision-making process for its quality parameters such as
robustness and reliability’. Hypothesis 4
is prompted by the ICT developments, stating that ‘enhanced availability of
multiple information resources, predominantly through specialised digital
information services such as the Internet, has a
positive effect on the strategic decision-making process in industry’.
In order to
facilitate the analysis of the structure of the decision-making process and
test the hypotheses, we have developed a model that shows the successive phases
in this process: starting with the preparation for a decision-making process by
formulation of the issue and setting the objectives, followed by collection of
internal information and external information on the environment of the
organisation, next the specification of potential alternatives, then limiting
the options by choosing between these alternatives and finally, reaching a
decision. As part of our research, we have evaluated whether this model
adequately describes the decision-making process for actual decisions taken by
executives in industry.
For our fieldwork, we first compared
several methods by which decision-making has been studied in the literature,
such as theoretical discussions and analyses of the decision process, case
studies, analysis of published accounts of decision-making processes, surveys
or questionnaires, ‘hands-on’ laboratory experiments and interviews with
decision makers. We choose to use the last method, of personally interviewing
executives, because in this way we
could accurately collect relevant first-hand data on the way they undertook the
decision-making process and observe how they used information in specific
recent issues that came on their agenda. The responding executives were all
members of the Board or executives directly reporting to the Board of companies
in the chemical and food processing industry with a turnover of € 300
million or more in The Netherlands and to a lesser extent in Germany. We chose
that segment of the industry as our target group because this limited segment
of industry could be covered by a significant number
of interviews to be able to generalise our findings about the decision-making
processes and the use of information thereby to the population of companies in
the process industry.
We identified
and discussed in detail thirty-two issues that had recently prompted a
strategic decision by the executives and we are able to identify 102 explicitly
stated decision process descriptions of the distinct phases followed during the
strategic decision-making processes. Almost all processes start with a
‘preparation’ phase, the grounding for the decision-making process; issues
originate from internal as well as environmental developments and trends. The
next phase is that of collecting and analysing of information, this phase
generally does not have a distinct beginning or an end as during the decision
process, continuously new aspects of the issues flare up that require
additional information to be gathered and analysed for relevancy, quality and
reliability. In cases where the analysis phase was mentioned
specifically, it was also possible to distinguish between internal and external
information sources. The intermediate specification of alternatives and
planning phase results in a number of alternative scenario’s;
all relevant information has now been collected, analysed and studied. Even so,
taking the final decision in some cases still necessitates an intense
discussion among Board members.
If we correct
our analysis of all 102 decision-making processes for those instances that a
phase was not deemed necessary, we see that in all
cases to be decided on, all 5 phases that we defined and used in our model that
needed to be pursued, were indeed consistently followed.
Based on the analysis of the phases
discussed during the interviews, we propose to add one extra phase to the
model, i.e. the assessment of the outcome of the specified alternatives. This
phase we identified in about 20% of the processes; it follows the ‘limiting’ phase
but precedes the final decision in that it is a check whether the potential
alternatives chosen do not unnecessarily harm the company’s interests e.g. by
‘value dilution’. The additional assessment phase has not been used often, but
is relevant as it shows that in order to come to a decision,
in some cases rationality requires that additional information is studied to be
able to appreciate the consequences of each otherwise valid alternative.
In rational decision-making,
information relevant to the issues that have to be decided plays a crucial role
in each phase of this process; executives have to acknowledge the facts in order to be able to consider an issue. The main reason
for the use of information is a reduction of uncertainty needed to obtain the answer
to an issue at hand. The value of information for strategic decision-making is supported by the results of our research. The information
used in the decision-making process can be distinguished
in internal information based on data such as that pertaining to technical
processes, financial parameters, and the customer base on the one hand and
external information on developments in the technical, commercial and
social/legal environment of the company on the other hand. Most companies have
a department responsible for documentary information such as an ‘information
services department’, often connected to the library. This information
department is usually concentrated in the research location of the company. But
several executives do not see the need for such departments nowadays because
they interpret the new access methods to information supported by software as
facilitating disintermediation: “employees can nowadays easily search for
and find their own information”.
In most companies developments in the environment of the company are
monitored so that the Board is at every moment prepared for an issue to arise.
Regular detailed internally generated reports on trends in production, supply
and demand, market shares and financial matters are now common practice.
Similarly, in most companies data on competitors’ behaviour are
collected by ‘competitive intelligence’ and from specialised consultants
and these are analysed regularly by staff departments for relevant issues for
the Board and stored in an internal database. Often selected information from
this database is available on the company Intranet.
Based on the results of our fieldwork
and analysis we have come to judge whether we can confirm the statements made
in our four hypotheses. The test of our first hypothesis is fourfold: firstly,
to test if the issues brought up for decision are indeed of a strategic nature,
secondly, whether there are clearly distinguishable phases followed in the
process, thirdly, if the process can be characterised as a rational process
rather than a satisficing or intuitive process and lastly if all relevant
information is used in the decision-making process.
As we have
indicated, in all decision-making processes discussed, strategic issues were
the subject of the decisions and all five phases that we had deemed necessary
for a structured process were indeed followed.
Furthermore, we note the similarity of the description of the phases
encountered in the decision processes that were discussed
with the executives and the fit with our model.
These results
are both confirmations of hypothesis 1. The results of our research as
discussed on the use of information in the decision-making process confirm our
hypothesis 2. Moreover, we have observed that this information is used to provide a rational underpinning of the decisions
made in each phase. This conclusion also constitutes a test to the rational
aspect of hypothesis 1.
Another
scrutiny method that we used to test rationality consists of observing whether
there are arguments that point to other than the rational approach to strategic
decision-making such as those mentioned in part of the literature on strategic
management. The result is that we did not observe during our interviews any
indication of these arguments, such as unduly great time pressure,
‘satisficing’ solutions or ‘bounded rational’ decisions due to limited
cognitive capabilities of executives or of lack of information that might have
resulted in intuitive approaches, nor did we find any signs of internal conflicts
or political manoeuvring about which way to proceed or undue avoidance of
uncertainty. As discussed here, all four tests for the hypothesis 1 are
positive.
In all discussions held, the aspect of
the quality of information used by the Board was stressed.
Generally, information that arrives ‘bottom up’ is
trusted more than information provided by external sources. Correct strategic
decisions can only be taken on correct and full
information. Sources of information that are selected and consulted are multiple
and depending on their origin and credibility are taken at
face value or put up for scrutiny by experts, be it internal or
external. Staff departments responsible for supplying information to the Board
check external information for robustness before it is
delivered to the Board. If the quality of the information is not up to
standard or cannot be verified, it is put aside. But
even so, executives do often check information themselves, one reason being
that staff departments are not always aware of the strategic plans of the
Board. These considerations confirm that hypothesis 3 can be
accepted as a true representation of practise by executives in industry.
Changes in
availability of information have brought changes in the way information is used in companies. But information overload because of
too many sources or too many documents is not an issue that was
mentioned. Apparently, these executives and their staff departments
apply effective coping mechanisms to deal with the stream of information
reaching them.
The facilitation of global knowledge exchange
brings with it the fact that competition becomes fiercer as any innovation
becomes public earlier than before and time to react is correspondingly
shorter. Some companies are able nowadays to perform research on a worldwide
24-hour schedule, they “forward results as a baton in a relay race” to their affiliates anywhere in the world.
These developments show that external information sources thus play a more
important and valuable role in decision-making by industry management than was
possible before. Although we agree that much more information is now available,
several executives remarked that “this does not
necessarily mean that decisions can be made faster: evaluation of this greater
mass of information takes more time and not everything is yet available
electronically.”
We conclude
that even if there can be no proof, the indications for an increased influence
of ICT achievements over the last few years on many cases of the process of
strategic decision-making sound convincing. Although this positive effect is
hard to substantiate conclusively, we have shown several indications to this
effect. We have shown that such an improvement can be characterised as a change
in the decision-making model with more sources being
consulted. With more relevant information available, discussions on
issues affecting the choices and alternatives can now be better controlled
which confirms hypothesis 4 which can be accepted as a valid statement.
From the results of the research, we
consistently observe indications that executives that are responsible for
strategic management of industrial organisations follow a structure as given in
our model of the decision-making process even though a broad spectrum of issues
has to be resolved.
We therefore can conclude that these executives follow a
structured and phased course that is rationally valid and reflected on, that
they have operated judiciously when taking important strategic decisions for
their organisation and that they display no sign of hasty or irrational
behaviour leading to bounded rational or satisficing decisions.