Strategic Business Decision-making: A Simplified Process
By Richard Chandler, MA, LPC, Licensed Professional Counselor and Strategic Leadership Consultant
A simplified strategic process for making business decisions is results-driven. Leaders stay focused on quickly and confidently arriving at the best strategy to increase their company's profits, market share, and cash flow. This article provides a decision-making process leading to developing a strategy to move your company forward.
As an owner, CEO, or leader of a business unit, it is critical that you choose a strategic decision-making process that gives you optimal results. This simple process for making strategic decisions can rapidly move your company to greater success.
Here are the 6 stages of this simple strategic decision-making process:
- Decide who decides
- Take a 'Bottom-up Approach'
- Categorize each business segment
- Divest of segments with a low market share within low-growth markets
- Apply the best strategic filters
- Assign roles and responsibilities for completing your strategic plan
Note: I wish to acknowledge author Richard Koch as the sources of some of the ideas presented. See my acknowledgment at the end of this article.
To start, make a decision that will prevent problems with buy-in for your new strategy. Get clear on whether your plan is yours alone to decide, includes contributions by associates or is a wholly collaborative process. First, determine the kind of strategic decision-making you will do.
Executive, Collaborative, or Collaboration-Informed Executive Decisions?
Leaders often make business decisions that confuse, disappoint, and devalue their leadership team. Why? After asking his or her team members for input, those members assume that the owner or CEO was making a collaborative decision. They may become hurt, disappointed, or even resentful when the decision doesn't seem to include their contribution. They might say: "Why were we in the meeting when what we said didn't even matter!" To prevent misunderstanding, the business leader must identify which of the three kinds of decisions he or she will be making and communicate it to the leadership team. Before proceeding, choose:
1. Executive Decision Made Without Consulting Others
A hallmark of strategic leadership is the ability to make a great many right decisions. The quickest and simplest way is to think through the variables on your own and decide. But you could miss something critical that another team member would have caught, leading to a poor decision. Another downside is that buy-in will be low when those who are responsible for executing the decision had no part in making it.
Executive decisions work best when you are the creator who has a clear vision of what you want. Steve Jobs or Apple comes to mind. His most exceptional products were born out of his clear vision and tenacity in bringing them into reality. His initial executive decisions to invent new devices were his alone. Bold new initiatives can lead to extraordinary success. Other people in your organization may lack the creativity and vision to see what is possible. There are times when coming to a decision on your own works better. Like Jobs, you must believe in your vision. Being talked out of it could prevent your company from pursuing an opportunity that could lead to extraordinary success.
2. Collaborative Decisions
Bring leadership team members, employees, board members, customers, or even suppliers into your decision-making process when you need ultimate buy-in. With collaborative decisions, the participants not only have a say; they have the authority to decide along with you.
This process often concludes with a vote. You could adjust for the fact that your investment is on the line by giving yourself more weight to your vote. The main point is that decision-making participants, including you, decide as a group.
3. An Executive Decision Made After Receiving Collaborative Input from Others
When you invite others to your strategic planning meeting, begin by announcing how much you value their insights and contribution. Tell them how their input helps you to make the best possible strategic decisions. Also, say that those decisions are yours alone to make. With this clarity, participants won't be confused and disappointed after you decide upon your strategic plan.
Why Choose a Bottom-Up Approach?
Most all of the articles and books that I have read about developing strategic plans start with a top-down approach. Executives orient by default to the organization as a whole. They begin by reviewing or updating their company’s vision, mission, and values statements. Next, they assess their overall position in the marketplace, including market share, as well as their tangible, financial, and people assets.
Building upon this initial assessment, they arrive at their strategic plan by subjecting their findings to a filtering process. The most commonly used filter is SWOT, which stands for strengths, weaknesses, opportunities, and threats. Strategic planning based on SWOT proceeds by:
- Identifying their company’s current strengths upon which they might build
- Owning up to their weaknesses, which they could choose to strengthen or to simply ignore
- · Looking for, or expanding upon, opportunities to seize
- · Identifying known or searching for hidden threats to their business
Decision-makers examine this information, based on overall mission, market positioning, and assets, and SWOT filtering. Next, it is sorted through, perhaps debated and finally reassembled to formulate the business’s strategic plan.
The Downsides of a Top-down Process of Strategic Business Planning
1. The Top-down Approach Proceeds as if the Business is a Homogeneous Enterprise.
Starting with the whole, rather than the parts, may blind the CEO, business owner and leadership team to the portions of the company that are generating substantial profits as well as the operations that are flat or even losing money.
Instead, consider thinking of your business as a series of separate companies or business segments. Doing so can provide surprisingly useful information. You and your team may discover that aspects of your business are not pulling their weight. Others may be performing better than anticipated. Analyzing the entire company as a whole makes it harder to find an opportunity or business peril.
2. Applying SWOT, or Any Other Filtering Method for Your Entire Business, May Lead to Poor Decisions
For example, if a business has negative cash flow and must quickly reverse it to survive, we may not truly understand where to cut and where to focus. It is imperative to look at the various business operations as if they existed as separate businesses to accurately know where to stop tying up scarce people, cash, and credit resources.
Simplify Strategic Planning by Segmenting Your Business
Strategic Leadership author Richard Koch defines a business segment this way: “Intuitively, this is anything that comprises a separate product, service or activity; or anything going to one group of customers as opposed to another group; or anything where the main competitor you face is different; or anything that may have different profitability.”
The business segmenting approach focuses leadership decision-makers on the profitability, or lack of it, of each distinct business segment within the overall company. See those separate business operations within a particular market as if each were an individual business, rather than just a part of your whole company. Seeing them as independent businesses, ask yourselves:
- Which ones are currently the most profitable?
- Which have the largest market share and the possibility of continual market share growth?
- Which is trending towards profitability?
- Which is trending downward?
- Which ones eat up the most resources in terms of personnel time, costs, and hassle factor?
- Which ones are in markets that are growing?
- Which are in flat or even declining markets?
The Boston Consulting Group (BCG) formulated a simple strategic process for evaluating business segments that make sense to invest in versus the segments you would consider divesting. BCG categorizes those segments as Cash Cows, Stars, Question Marks, or Dogs.
The Best Strategic Process for Making Business Segments Decisions
The Boston Consulting Group’s (BCG) strategic process for deciding on the business segments you wish to invest in versus the ones to divest is to categorize them as Cash Cows, Stars, Question Marks or Dogs.
You determine the four categories of businesses by the relationship between a company’s market share, which is the horizontal axis, and the vertical axis of anticipated market growth. Here is how those four types of organizations are categorized:
- Dogs. The worst position is the bottom right, where a company’s share of the market is low. That particular marketplace also has slow growth. It is not likely to increase profitability.
- Cash Cows. On the bottom left, we have companies with a significant market share in more mature markets where the growth rate is slower. With a higher market share, a company generally has much higher profitability. With the relative stability of that particular marketplace, the business supports high, consistent positive cash flow and profits.
- Stars. On the top left, we have companies with a significant market share in a quickly growing market. In general, the best strategy for star companies is to invest heavily to maintain or even increase your market share and enjoy assent to high profitability. Leaders of star companies often borrow heavily, sell, or take on additional investors during the star phase. Doing so allows them to dominate that market leading to a great deal of company value.
- Question Marks. On the top right, the company’s present market share is low, but it is in a high-growth market. The question is whether or not it makes sense to invest. Doing so could gain market share and turn this business or business segment into a profit center. But competitors are likely also to invest heavily. Your business segment may not necessarily increase in market share compared to your competitors and therefore, places your investment at risk. You must question whether it is a strategically wise decision to commit.
Does Higher Market Share Always Equal Higher Profits?
Analysis using the BCG matrix assumes that companies with higher market share most always have lower costs and higher profits than competitors who lack the economy-of-size. While this is generally the case, it may not be for your company or business segment. Perhaps you have a disruptive technology that allows you to have lower costs and pricing. If so, you can still rapidly gain market share from your competitors.
Gain Market Share by Finding a Niche & Strategically Resegment the Marketplace to Your Company's Advantage
Another option for low market share is to discover a niche in the marketplace. By strategically resegmenting the marketplace and carving out a particular niche, you could dominate in that defined arena. The best strategic solution for smaller businesses or business units is to resegment the marketplace in your favor.
How might you do this? There may be a market segment of the broader marketplace with similar characteristics. Perhaps ones of geography, account size or easy ways to access to their decision-makers. Try to discover those defined market segments that your company can serve better than your larger competitors. Reach out to those potential customers and find out if they will buy from your company. In helping those accounts, find out what else you can do to solidify their allegiance to your company. Redesign your product or service to satisfy their needs. Rapidly scale up this market segment.
Apply a Variety of Filters to Your Business Segments to Reveal Profit Opportunities
After identifying your business segments as Cash Cows, Question Marks, Stars - and deciding to divest your company of the Dogs - apply a variety of filters; the lenses that you look through to make your best strategic decisions.
We have already discussed the thinking filter of SWOT, a company’s Strengths, Weaknesses, Opportunities, and Threats. Although it is an excellent filter, it may not be the optimal lens for strategic decision-making in every situation.
The Filters of Cost-Cutting & Refocusing for Turning Losses into Profits
Let's imagine your company has a business segment that you have identified as a 'Question Mark,' for example. That business segment is in a fast-growing market but is currently losing money. A better filter than SWOT could be “Cost-cutting and Refocusing.”
You determine that your Question Mark business segment will rise within its growing market. You believe that it could be a good source of profitability once costs are under control, and you have refocused your marketing of that product or service. You develop your strategic plan further by identifying where to cut costs and to decide on how to refocus marketing of this product or service.
The Visionary Lens
Another possible filter is “visionary.” The late Steve Jobs of Apple inspirationally applied a visionary filter. This filter takes what we learned from all of our previous strategic analysis and develops a plan leading to the invention or redesign of a new product, application, or process. A visionary filter could also lead to identifying a unique niche to serve.
The Repurposing Lens: Import 'Best Practices & Innovations' from Other Regions, Countries or Industries
Exploiting what is already working, but in locals beyond your own, can be one of the best ways to transform business segments, and collectively, your entire organization! The reason why is that those methodologies are already proven. If they have worked in other industries or regions, it is likely that you too will have success after importing and adapting them.
Complete Your Simple Strategic Decision-Making by Assigning Roles & Responsibilities
For simple plans we avoided a Top-down approach. We also did not address all of the people issues. In order for your plan to be successful, the leadership elements would need to be added. Simple decisions to identify who is responsible for initiating and following through with the plan are vital for success.
Let's review the overall simple strategic process for decision-making:
- Decide who decides: You alone. You, but with the input of associates. Your entire leadership team.
- Take a Bottom-up Approach. Analyze your company to identify the specific group of separate business segments.
- Categorize each business segment as either a Cash Cow, a Star, a Question Mark or a Dog.
- Divest of the Dogs.
- Simply apply the most strategic filters to the remaining business segments to complete your decision-making.
- Assign roles and responsibilities for completing your strategic plan
On a future companion article, I will address the vital strategic leadership process with focus on the human side of moving your plans forward.
Richard Chandler, MA, LPC, author and Strategic Leadership Consultant
I can help you to create a strategic plan for your company. Simply contact me and we can discuss this possibility as part of your no-cost consultation.
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Acknowledgement: I wish to acknowledge author Richard Koch. Some of the ideas presented in this article are my take on his thoughts. He presents them in The Financial Times Guide to Strategy: How to create and deliver a winning strategy, 3rd edition. It is published by Prentice Hall. I highly recommend it for gaining a more in-depth understanding of how to formulate simple, strategic decision-making processes for businesses. Ideas from his book, Simplify, also relate to this article.