Formal structured (or simply formal) approach involves strategic decision making in anticipation of the future state that the organization wants to be in. Strategic decisions are based on socioeconomic purposes of the organization, values of top management, external opportunities and threats, and organization’s strengths and weaknesses. The basic features of this approach are as follows:
- Strategy making is based on analysis of various factors which affect the strategy.
- It involves systematic and structured approach to the solution of problems and also the task of assessing the cost and benefit of various alternatives.
- It is a comprehensive process which produces a set of integrated decisions and strategies.
In India, most of the multinationals follow this approach in which they have formalized and structured their strategic decision-making process. Suitability and Limitations
Suitability and limitations: of formal approach depend on type of organization, management styles, complexity of environment, complexity of production processes, nature of problems, and purpose of planning system. The table below presents the situations which determine the degree of formalization.
Exhibit Factors affecting degree of formalization in strategic decision making (Table)
| Factor | More formalization | Less formalization |
| Organization | Large companies | Small one-plant companies |
| Management styles | Policy maker | Democratic-permissive |
| Authoritarian | intuitive thinker | |
| Environment | Stable | Turbulent |
| Little competition | Severe competition | |
| Production process | Long production lead time | Short lead time |
| Integrated processes | Simple processes | |
| High technology | Low technology | |
| Long market reaction time, | Short market reaction time | |
| Nature of problems | Tough, long range | Short range |
| Purpose of planning system | Coordinate division activities | Train managers |
A basic advantage of this approach is that it generates enough information which enables decision makers to make decisions in complex situations. However, when decision system becomes too formalized and highly structured, decision-making process becomes slow because of emergence of professional bureaucracy which relies on standardization of skills. Decision making is decentralized and takes place where the expertise exists. With the result, unusual decisions are hard to come by.
Adaptive Approach: Adaptive approach of strategic decision making is basically reactive and tries to assimilate the change in decision-making context various factors, particularly environmental ones, affecting strategic decisions. Various features of strategic decision making under adaptive approach are as follows:
- Decision making is basically meant for problem solving, rather than going for new opportunities. Adaptation process is adopted to meet the threats by changed environment as against the decision making to meet the anticipated changes in environment which entrepreneurial approach suggests.
- Decisions are made in sequential, incremental steps, one thing at a time necessitated by environmental changes. The basic orientation is to maintain flexibility to adapt the decisions to more pressing needs.
- Various interest groups and stakeholders put considerable pressure on decision-making process so as to protect their own interests. Thus, the ultimate decision is a compromised one which may be, sometimes, at the cost of optimizing organizational effectiveness.
- Since decision-making is incremental and fragmented, there is lack of integrative decision-making. With the result, systems approach of decision-making is missing.
In India, most of the public sector organizations follow adaptive approach in their decision making because of the power distribution between organizations’ management and controlling ministries of Government. Those organizations in the private sector which cannot anticipate likely future scenarios either based on vision and intuition or through formal and structured approach of environmental analysis follow this approach in their strategic decision-making process. Suitability and Limitations
Adaptive approach of strategic decision-making is suitable for those organizations, which tend to play the role of followers rather the role of leaders in the industry sector concerned. This approach saves them from high risk since the strategic decisions are based’ on the actual environmental factors. If these factors are less dynamic, this approach produces satisfactory results.
However, this approach suffers from one basic limitation. Environmental adaptation as a continuous process works well so long as there is continuity in environmental changes which can be assimilated quickly by the organizations adopting this approach. When the environmental factors change fast, this approach does not work because by the time, the organizations adopt one change which has some lead time, environment changes further making previous adaptation unworkable. In the present context of global competition, perhaps, this approach is not very suitable to achieve meaningful competitive advantage.
Combining Different Approaches: We have seen above that various approaches of strategic decision making have their positive and negative aspects and each of these is suitable for particular type of organizations and the nature of environment. Since there are many variables which affect strategic decision making, many organizations follow a combination of different approaches. The experts on strategic management also hold this view, For example, Sumantra. Ghoshal, Professor of Strategic Leadership, comments that “it may be useful for Reliance (following entrepreneurial approach) to think whether it should follow a bit of Hindustan Lever’s structured processes, just as much as it may be productive for Hindustan Lever to consider ways of broadening its systems and culture to the entrepreneurial approach. In fact, Hindustan Lever has restaged the need for infusing entrepreneurial approach in developing business level strategies. According to its former Chairman, Keki Dadiseth, “Hindustan Lever has grown in size. While it has its own obvious benefits, it also brings some drawbacks. What we need to master is the art of creating and preserving the entrepreneurial ability and connectedness of a small company within a large company. There may be different ways in which various approaches may be combined together. More common ways are as follows:
- Adaptive entrepreneurial
- Structured adaptive
- Entrepreneurial structured
- Adoption of different approaches for different businesses, and
- Adoption of different approaches at different stages of organizational life
While combining two or more approaches together the individual organizations can do better if they evaluate their culture, human resources, and leadership styles and the nature of environment in which an organization or its different businesses operations
Snapshot of Strategic Management Process Strategy Formulation
Formulation of organizational mission and objectives
- Formulating mission and mission statement
- Business definition in terms of customer, product, and technology
- Formulating long-term broad objectives
Environmental analysis
- Analysis of general environment
- Industry and competition analysis
- Preparation of environmental threat and opportunity profile
Organizational analysis
- Analysis of strengths and weaknesses in different areas
- Preparing organizational capability profile
- SWOT analysis
- Defining core competence and distinctive competence
- Developing competitive advantage through
- Generic competitive strategies
- Strategic intent
- Benchmarking
- Synergistic approach
- Critical success factors approach
- Preparing competitive advantage profile
Strategic alternatives
- Stability strategy
- Retrenchment strategy
- Turnaround strategy
- Divestment strategy
- Liquidation strategy
- Growth strategy
- Concentric expansion strategy
- Vertical integration strategy
- Diversification strategy
- Merger and acquisition strategy
- Joint venture strategy
- Strategic alliance
- Combination strategy
- Business restructuring strategy
Choice of strategy
- Focusing on strategic alternatives
- Evaluating strategic alternatives
- Considering decision factors
- Strategy choice
Strategy Implementation
Activating strategy
- Institutionalisation of strategy
- Resource mobilisation and allocation
- Translating general objectives into specific objectives
Procedural implementation
Structural implementation
- Designing organisation structure
- Prescribing organisational systems
Functional Implementation
- Prescribing policies and strategies in
- Production/ operations
- Marketing
- Finance
- Human resources
Behavioural implementation
- Leadership implementation
- Managing organisational culture
- Creating values and ethics
- Corporate governance
- Managing organisational politics
Organisational change and innovation
- Initiating and implementing organisational change
- Managing organisational innovation
- Creating learning organisation
- Critical success factors approach
- Preparing competitive advantage profile
Strategy Evaluation and Control
Designing evaluation and control system
- Setting criteria for evaluation and control
- Setting standard in respect of these criteria
Exercising control
- Strategic control
- Financial performance control
- Social performance control