Chapter 4: Theoretical approaches to strategic decision making and organisational change
Chapter 4: Theoretical approaches to
strategic decision making and
organisational change
Essential reading
Two of the readings for this chapter are from the main key text and one
additional source is used for the subject of strategy from the secondary
key text for the unit. The final reading is a special appendix for this
chapter on the subject of game theory, and is contained in Appendix 1 at
the end of this guide.
• Management and Organisational Behaviour by L.J. Mullins
Chapter 22 ‘Organisational Development’, pages 909–33, The nature of
organisational change, up to and including Case 22.1 on the Wakeford
Organisation.
Chapter 23 ‘Management Development and Organisational Effectiveness’,
pages 964–71, Total Quality Management .
Management by R.L. Daft
• Chapter 8 ‘Strategy formulation and implementation’.
Further reading
The further reading for this chapter includes suggested book chapters and
some journal articles. Do remember that, as stated in the Introduction,
you are advised to refer to journals whenever possible. This is where upto-date research is reported and they can also be a source of interesting
case studies. Four recommended journals were mentioned in the
Introduction. This is a good time to have a look at these if you have not
already done so.
Johnson, G. and K. Scholes Exploring Corporate Strategy (2005) Chapters 1, 2
and 11.
Miller, G. Managerial Dilemmas: The political economy of hierarchy (1997)
Introduction to Part Three (pages 179–81) and Chapter 9 ‘The possibilities
of co-operation’.
Needle, D. Business in Context: an introduction to business and its environment
(2004) fourth edition, Chapter 4 ‘Management Strategy’.
Nutt, P. ‘Decision-making success in public, private and third sector
organisations: Finding sector dependent best practice’, Journal of
Management Studies (2000) Volume 37, No. 1, pages 77–108.
Porter, M. ‘What is Strategy?’, Harvard Business Review (1996) Volume 74, No.
3 Nov–Dec, pages 61–78.
Aims of the chapter
In particular Chapter 4 aims to:
• consider decision making within a business
• look at business strategy
• see how decisions are made
• identify factors which contribute to the need for change
• explain ways of managing organisational change and the decisions
involved.
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Introduction to business and management
Learning outcomes
On completion of this chapter, including your study of the guide and
essential reading, you should be able to:
• understand and evaluate different approaches to the process of
making decisions, particularly at the strategic level
• appreciate the importance of strategy and be aware of the decisions
involved in formulating a business strategy
• recognise the constraints placed on the manager during the decisionmaking process
• identify the different techniques used to support managers when
making decisions and developing strategy, and evaluate the usefulness
of these
• recognise the importance of the business environment, as an
introduction to the third section of the unit
• understand different types of organisational change, and identify the
triggers which can generate the need for these
• evaluate different approaches to managing organisational change and
identify and explain techniques for overcoming resistance to change.
Introduction
In Chapter 3 we looked at the role of the manager in business, including
analysis of the decisions that managers have to make in their various
roles. In this chapter we consider how management is shaped by a
business’s strategy and how the activities of managers shape strategy. This
will include exploring theoretical contributions to making strategic
decisions and understanding organisational change.
This chapter includes much detailed argument and describes a number of
models, and it may take you longer to study than some of the others.
There are seven sections, covering decision-making, strategy, theories and
models for making decisions, other aids, organisational change and
development, the change process and managing resistance to change. A
number of readings from the books by Mullins and Daft helpfully expand
the notes in this subject guide.
Do not rush this chapter. You should not be surprised if it takes you three
weeks of part-time study. If you hurry you may confuse the ideas
presented here. You will find, if you take them slowly, however, that they
are logical and can be understood and remembered satisfactorily.
4.1 Decision making in business
This section of the syllabus focuses on decision making, and this is a key
theme running throughout the unit. In the last chapter we considered the
different roles that managers play and decision making was found not
only to be a central role, but one that is part of every role the manager
plays. Chapter 5 will consider the different functional areas of the
business and the types of decisions involved in managing each of them.
Therefore, decision making is at the core of managing and central to the
operations of the business. Here we will consider decision making in
more detail, and this will then be related to the concept of strategy.
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
We start by returning to basics and the need to be clear about the terms
we are using. How would you define a decision? A decision is the
product of the decision-making process, but what is decision making?
Think about the decisions we discussed in Chapter 1, or decisions that
you make yourself. There can be many ways of understanding this
process, but generally it is helpful to think of decision making as the
process whereby a course of action is chosen from a range of
possibilities, to achieve a specific purpose. Add this definition of decision
making to your glossary.
The decision, then, is the product of this process, the chosen outcome or
course of action. Relating this to the business context, our studies so far
show that decisions can take many different forms. For individual
managers, two major factors that affect their decision making are the
roles they have and the organisational environment. This latter point is
very important to the decision-making process, and the third section of
the unit looks at environmental factors in greater detail.
In this chapter we are specifically interested in strategic decision
making. However, it is helpful to understand how this type of decision
contributes to the range of decisions needed within the organisation.
Hellriegal and Slocum (1989) offer a distinction between three main
types of decisions:
Types of decisions
• Routine decisions – these are made frequently by lower-level
managers, concerning well-defined problems. Formal rules and
regulations would be consulted to choose the most appropriate course
of action.
• Adaptive decisions – these are often based around similar
problems to those which require routine decisions, but the problem is
less defined or less well known. Past decisions would be consulted and
modifications made to result in the best decision.
• Innovative decisions – these are less usual and involve unknown
or vague problems. Creativity is needed to find the best solution to
this type of decision.
From the above it can be seen that different kinds of decisions can be
associated with different levels in the business organisation. In the typology
(the categories of different types) developed above, routine decisions are
more likely to be made by lower-level managers or line-managers, but it
should be noted that these can also involve non-managerial staff such as
supervisors or team leaders. In contrast, innovative decisions are more
likely to be made by higher levels or top management. Again, however, in
some organisations lower-level managers or other employees can
sometimes be invited to develop creative solutions to problems.
Activity 4.1
Try this exercise, but do not spend more than 15 minutes on it.
The following individuals all work at the same organisation, but at different levels. The
organisation is Lo Cost Ltd, a chain of supermarkets. Think about the job that each
employee does. What types of decisions would be involved in these jobs?
Write down two decisions that each of these employee might have to make. To get you
started, you have been provided with one example for each employee.
1. A supervisor for the checkouts in one branch of the supermarket (example: how
many tills should be open at once?)
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Introduction to business and management
2. The CEO of the company (example: should a new store be opened?)
3. A store manager who has responsibility for one particular branch (example: what
can my store do to improve sales?)
Feedback
All these various decisions will require different approaches. However, several major
stages in the decision-making process can be identified as relevant to most; they are set
out in the text below. As you evaluate each stage think about your example decisions
and how each would fit into this process.
Stages in the decision-making process
1. The decision-maker needs to be consciously aware of the
situation. This involves understanding the factors that affect the
decision to be made, and recognising those elements which are out of
the control of the decision-maker, such as the constraints placed on
the decision.
2. The decision-maker needs to recognise the real problem.
Before being able to develop a solution it is important to study and
understand the problem fully, especially when multiple or complex
problems exist. The decision-maker has to be sure to get to the central
issue and so make a decision that matches the real problem.
3. Information needs to be gathered and alternative
solutions developed. This is a key stage and is vital if the best
decision is to be made. Good communications are required to gather
all the relevant information. The search for alternatives involves
generating as many solutions as possible.
This was the subject of a recent piece of research by Nutt (2000), who
studied how a range of organisations developed alternative options as
responses to problems faced. Different methods of generating
alternatives included benchmarking (exporting the practices of other
individuals and organisation), innovation (custom-made solutions),
and existing decisions. This investigation into the decision-making
process found that private sector organisations make better decisions
when innovative alternatives are sought, but it was found that they
are actually more likely to use an existing solution.
Why do you think this might be? What could attract a manager to use
an existing solution that has been used before, rather than spend time
generating an innovative alternative? Could it be the pressure of work
and shortage of time?
4. The best solution is decided on. This decision comes out of
careful analysis of the alternatives that were generated and evaluation
of the relevant costs and benefits of each.
5. The decision is implemented. For successful implementation it is
necessary for the decision to be accepted by the organisation, because
decisions relate to a chosen course of action that often requires the cooperation of others. Therefore communication may be important
again, for explaining the decision and the reason for it.
6. The implemented decision needs to be monitored and
evaluated. This is particularly important for major decisions, where
the outcome has great significance for the organisation. It is also
especially important when situational factors are likely to change, and
so the most appropriate solution may change.
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
7. Any necessary changes or modifications need to be made.
Related to the above point, if the situation does change or it is found
that the best solution was not chosen, then the course of action
resulting from the original decision needs to be adapted and this is
needed on an ongoing basis.
If you think back to the example decisions you wrote down earlier for
different levels of management, you should now see that big decisions
would go through these stages more systematically than other simpler ones.
For example, think about the difference between a supervisor deciding
how many tills to open, and the CEO deciding whether to open a new
branch.
Spend a few minutes on this before reading further.
For the CEO, each stage would involve a great deal more work and the
implications of the decision are much greater. It is the decisions at the top
level of the organisation that we are most interested in for this chapter.
However, this general discussion of decision making should make it
possible for you to make comparisons with the other levels and types of
decisions necessary for the operation of a business.
4.2 Strategy
Activity 4.2
We noted in Chapter 3 that we would return to reading in Activity 3.1.
Reading
Look now more closely at:
• Mullins (2005) Chapter 5 ‘Organisational Goals and Objectives’, pages 144–60.
This covers the topic of setting goals. Read these pages more slowly now, because goal
setting is a crucial step in designing a strategy.
Defining the term strategy is difficult – it is another one used differently by
different people. We are specifically interested in business strategy, and
some common characteristics can be drawn out from most definitions.
These would include that a strategy is concerned with the long-term
operations of the business and that it has significance for the whole
organisation. One definition put forward is that a business strategy is:
the pattern or plan that integrates an organisation’s major
goals, policies, and action sequences into a cohesive whole.
(Mintzberg et al, 1996, 3)
If you are not quite clear on strategy yet, test yourself with the following
short activity.
Activity 4.3
Look at these four statements and in each case say whether they are true or false.
1. An objective is a way of achieving a strategy.
2. Planning comes first, then you decide on your strategy.
3. You can have a strategy without having any goals.
4. A good strategy is an end in itself.
Give yourself a few minutes to answer these before looking at the feedback!
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Introduction to business and management
Feedback
All the statements in the question are false. Come back to this question at the end of
this chapter and make sure you can see why.
What does our definition of strategy have in common with our
understanding of management? Well, both involve goals although, at the
strategic level, goals are set for the whole of the organisation rather than
for one section or for one particular project. Strategic goals are those that
are used to direct the organisation.
Mission statement
One way of explaining and communicating these strategic goals is within
a corporate mission statement, (look at the section on mission statements
on page 151 of Mullins, 2005, for an example). An organisation’s mission
statement is a general declaration of the overarching purpose of the
business, and is closely related to the culture of the organisation, which
will be discussed in Chapter 6.
Activity 4.4
Think of the different organisations that you have belonged to, perhaps places where
you have worked or studied, or places where you are a member, such as a bank or
library.
1. Were you aware that any of these organisations had mission statements? If so,
where did you see the statements displayed?
2. For those organisations that did not have statements, what do you think these
might have been? Write a short mission statement for one of those
organisations.
The mission statement should offer managers and all employees a guide
as to what the organisation values and aims to achieve, so this can help
the decision-making process. Strategic decisions, then are those, which
contribute to achieving the organisation’s mission.
Porter (1996), however, points to a change in approaches to strategy as
managers have come to recognise that no single best strategy necessarily
exists. An alternative view is that an optimal strategy can be different for
all organisations, and depends on certain contingencies. Can you
recognise links here to broader trends in management theory?
Old view of strategy
Adaptable view of strategy
Implicit Strategy Model
Sustainable Competitive Advantage
Strategists seek the one ideal
competitive position
Strategists seek a unique competitive
position that suits their business
Table 4.1 Porter’s views of strategy
Source, adapted from Porter, 1996, 74
Formulating strategy
To recap, we know that strategy is related to the achievement of the
organisational mission. We also know that the strategy should have
significant impact on the organisation and that it should be concerned
with the long term. But how is the strategy formulated? What process
does this involve?
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
Think for a few minutes, then read on.
The formulation of a business strategy is similar to that of the general
decision-making process. Several stages are usually involved, although
again this will be adapted to the needs of each organisation. These stages
can be explained as follows.
1. Strategy-makers first need to be aware of the current
situation of the organisation as well as the external
environment. Several tools are available to help managers carry out
this sort of analysis and these will be detailed later in this chapter.
2. All possible strategies need to be identified and then
evaluated. This will involve considering the likely results of each
strategy and linking them with the mission of the organisation. Again,
models exist for aiding evaluation of these and will be looked at later.
3. The best strategy then has to be chosen. In making this
decision the strategy-makers will again need to refer to the
organisation’s mission and will need to be confident that this strategy
will satisfy the main goals of the business.
4. A plan of action needs to be devised to implement the
strategy. This will involve the setting of targets or objectives, to
indicate measurable results achievable along the way. This stage could
also involve the creation of specific organisational policies in keeping
with the strategy, to integrate the mission with the operational
activities of the organisation. An important part of the implementation
also involves communicating the strategy to all parts of the
organisation, to ensure that goal setting and decision making at all
levels can be done in line with the corporate strategy.
5. The final stage is continual, involving the monitoring and
adapting of the strategy. Once the strategy is designed and
implemented, that is not the end of the story but the beginning, for the
strategy has to be adapted and amended in accordance with changing
organisational variables. Porter (1996, 78) defined this as ‘strategic
continuity’ and stresses that continual improvement in efficiency is not
an alternative to strategic continuity, but strategic continuity will
actually ‘make an organisation’s continual improvement more effective’.
Comparing decision making and strategy making
Compare the decision-making process discussed earlier with the strategymaking process. What do you think are the main differences and
similarities? In the same way as we discussed making decisions, can you
also see how the process of formulating strategy will be dependent on the
situation?
For example, think about how the different stages will be relevant to a sole
trader (someone who has their own business but is the only employee),
who is deciding on a business strategy for their fruit stall, compared with a
special strategy team formulating the strategy of a company that will be
created by the merger of two existing banks.
Strategic decision making
Once a business strategy has been defined, its continual application
involves decisions being made on an ongoing basis at the strategic level.
These decisions, like the overall strategy, involve the long-term operations
of the business and have significance for the whole organisation. Johnson
and Scholes in their book Exploring Corporate Strategy put forward the
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Introduction to business and management
characteristics that are often associated with strategic decisions:
Characteristics of strategic decisions
• Strategic decisions are likely to be concerned with or affect the longterm direction of an organisation.
• Strategic decisions are normally about trying to achieve some
advantage for the organisation, for example over competition.
• Strategic decisions are likely to be concerned with the scope of an
organisation’s activities: does (and should) the organisation
concentrate on one area of activity or should it have many?
• Strategy can be seen as the matching of the activities of an
organisation to the environment in which it operates.
• However, strategy can also be seen as building on or ‘stretching’ an
organisation’s resources and competences to create opportunities or to
capitalise on them.
• Strategies may require major resource changes for an organisation.
• Strategic decisions are therefore likely to affect operational decisions.
• The strategy of an organisation is affected not only by environmental
forces and resource availability, but also by the values and
expectations of those that have power in and around the organisation.
(Johnson and Scholes, 2005, 4–10)
Activity 4.5
You do not need to complete this activity all at once: you may find it more useful to
spread it over a week or so.
Gather together at least three examples of a corporate mission statement. These can be
found in corporate literature such as annual reports, or they may be displayed in the
premises of organisations, or on their web sites (a listing and links to many large
corporations can be found at www.fortune.com).
1. What similarities can you identify between these statements and what
differences?
2. Choose one of the mission statements. Look back to the stages in formulating a
strategy, and write down the type of options that may be suitable for achieving
the mission of that organisation. Evaluate the alternative strategies you have
developed. Which option do you think you would choose and why?
3. If your chosen strategy was implemented, what impact could this have on the
future strategic decisions that top management could have to make? For
example, if the opportunity arose to buy a smaller company working in a similar
area, would your strategy help to guide the decision-makers or indicate the main
factors to be considered?
We have now considered decision making and particularly how this
relates to the overall mission of the organisation. This mission is a strong
determining factor for the formulation of the business strategy, which
further determines and guides the strategic decisions that need to be
made by top management on a continual basis.
4.3 Theories and models for making decisions
We go on now to look at the theories, models that have been developed
to assist managers in making decisions at all levels but, in particular,
formulating strategy and making strategic decisions. Many different
approaches have been developed and as technology also advances, so do
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
the aids available to support managers in their decision making. Here we
are able to introduce a selection of these, some of which are developed in
the essential reading. It is also possible that you will investigate some of
them in more detail in the other units that you study.
We will first look at some models of decision making, before moving on
to decision theory and game theory.
Rational model
The classical model of decision making is known as the rational model.
Within this, decision making is seen to be a rational and objective process
to achieve predictable results.
The decision-maker would be seen to go through similar processes to
those we have outlined in the last sections. The rational decision-maker
would identify the problem, generate possible solutions and then make
the best decision according to the information he or she has.
Activity 4.6
1. What possible problems can you identify with the rational model of decision
making? Think about the assumptions that it makes about the situation, and
make a list of these.
2. What difficulties could there be in applying this model to the type of decisions
managers make in their daily work?
Look back at Chapter 3 and the difference between what managers should do in theory
and what they do in practice. Perhaps this applies here as well? Think about it for a
minute before reading the feedback to this activity.
Feedback
The rational model assumes that:
• decision-makers have the necessary information to generate possible alternative
options and to evaluate them
• managers have time to gather this information and do this evaluation
• managers are therefore trying for a condition of certainty
• managers operate in a stable situation where the variables are not changing
• goals of managers and the strategy they are working to are defined and agreed
• decision-makers make rational choices by selecting the option that will bring
most benefit.
Since it is difficult to use a rational model, the next question is - can you think of a
situation where a manager may not make a rational decision? What sort of factors could
influence a manager to make an irrational choice? Think about this. For instance, say a
manager has interviewed five candidates for a job. Now she has to make a decision.
Think about how she might make it, given that she cannot use the rational model.
Reflect on this for a few minutes before reading on.
Model of bounded rationality
The assumptions made by the rational model means that in practice it
might only offer an ideal type, one to be striven for but usually
unobtainable because of the complexity. Herbert Simon (1992) was one
of the first to identify the problems with this model, and from these
criticisms developed the model of bounded rationality.
This approach recognises that in reality decisions are often made under
stressful and unstable conditions. Therefore, the potential for rationality
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Introduction to business and management
is ‘bounded’ and constrained. It is suggested that managers make
decisions as best they can under the conditions they find. This may
involve operating with imperfect information. For example the idea of
‘hidden information’ (Arrow 1985) is used to describe the situation when
one party in a potential transaction has more information, is thus better
informed than the other parties, and so is better able to make a decision.
The bounded rationality model states that decisions need to be made
within the constraints and pressures of organisational life, and so
managers have to make the decision ‘that will do’. The term used to
describe this is ‘satisficing’, the practice of choosing an option that may
not be the optimal solution, but one that does satisfy the minimum
requirements to achieve a goal or solve a problem.
Bounded rationality in practice
Can you think of a situation where a manager may make a decision
under less than perfect conditions and base his decision on satisficing?
One example could be when a manager has to decide whether to buy a
piece of new production machinery. If the item was at a significantly
reduced price for a limited amount of time, the manager would be under
pressure to decide this before it would be possible to make full
calculations as to the return this could bring and the training needed. It is
also impossible for the manager to know whether more advanced
machinery will be available soon. Therefore the manager may gather
information on the price of similar machinery available now, contact the
production and finance departments for initial estimates of the possible
return, and then base a decision on this.
Think of your own example and identify the factors that would prevent an optimal or
fully ‘rational’ decision from being made.
What problems can you see with using the bounded rationality model in practice? Think
for a few minutes.
One of the major problems with the bounded rationality model is that it
can lead managers to make the easiest or first decision possible. It may also
result in managers continually using old decisions and applying them to
new situations if they know that the old decision would at least meet the
minimum requirements. A study of management decision making by Nutt
(2000) supports this view. One of the major reasons for this is the desire to
avoid risk, thereby limiting opportunities for creativity and innovation.
Garbage can model
Another approach that recognises complexity and uncertainty is the
garbage can model (Cohen et al. 1972). This is particularly relevant to
turbulent situations, and introduces the element of chance or
randomness. The organisation is seen to contain individuals, problems
and possible solutions, but these are floating around separately. It is the
job of the manager to bring the right ones together at the right time, and
the results may involve radical decisions.
In Figure 4.1 it can be seen that individuals, problems and solutions are
present and exist independently. The manager’s role is to link them
together to create solutions. This action is represented by the arrows. In
the example shown, the manager has found a solution to Problem 3 by
linking the problem with Individual 1.
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
Individual 1
Problem 1
Problem 2
Solution 1
Problem 3
Individuals 2,3,4
Individual 5
Problem 4
Solution 2
MANAGER
Figure 4.1 How a manager finds a solution within an organisation
Political model
This model describes the decision making process in terms of particular
interests and objectives of powerful stakeholders. Internal and external
stakeholders use their power to influence the different stages in the
process (e.g. define problems for their own advantage and set their own
objectives). Stakeholders often distort and selectively withhold
information to further their own interests. Within the organisation
different departments will have different goals which will affect their
decisions. Similarly external stakeholders will have their own agendas.
Decision theory
As we have already noted, managers are often charged with the
responsibility of making complex decisions. Decision theory, which we
introduce here, is one way of analysing decision situations and is mainly
used for situations in which there is one decision maker. Game theory,
which we look at next, extends the idea of decision theory to situations
where two or more decision-makers interact.
The decision maker faces a series of options each of which leads to
payoffs with certain (subjective) probabilities. Decision theory can
sometimes help managers to clarify the situation and decide upon an
optimal course of action.
We start by analysing a simple decision.
The issues involved are best understood in terms of what is called a
decision tree which contains the main constituents of the problem.
These are:
• the decisions
• the sources of uncertainty
• the pay-offs, namely, the results of each possible combination of
probabilistic outcomes and decisions.
The basic idea is to:
• construct a decision tree
• attach some value (payoff) to the ‘outcomes’ indicated by the decision
tree
• estimate the best (expected) outcome.
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Introduction to business and management
A decision tree is best introduced by an elementary example, as shown in
Figure 4.2.
Payoffs of actions
Action 1
7.0
0.25
10
0.50
5
0.25
8
0.25
10
0.25
4
0.25
–2
0.25
–4
7.0
Action 2
2.0
Figure 4.2 Decision tree
The decision-maker must choose between Action 1 and Action 2.
Some conventions
This shape is called a decision (or action) node:
This shape is called a probability node:
Lines (arcs) from action nodes are actions available at that node. Lines
(arcs) from probability nodes are beliefs by the decision-makers about the
probability of outcomes. They sum to unity at each node. Outcomes are
exclusive. Payoffs are the monetary values of the actions to the decisionmaker.
The probability nodes are labelled with the respective expected payoffs
(see below). Note – the payoffs are those which the decision-maker
attaches. Another decision-maker may have different payoffs. In more
advanced theory, payoffs are often measured in terms of utility.
The probabilities may be objective or the subjective estimates of the
particular decision-maker.
The question that now arises is this:
a. Which should the decision-maker choose (normative theory)?
b. Which will the decision-maker choose (positive theory)?
If the decision-maker is rational, a) and b) should be the same.
Use the expected value theory as follows:
Expected value of Action 1
= (0.25)(10) + (0.50)(5) + (0.25)(8) = 7.0
Expected value of Action 2
= (0.25)(10) + (0.25)(4) – (0.25)(2) – (0.25)(4) = 2.0
The decision-maker will/should choose Action 1: that is, maximise
expected payoff.
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
Note:
• Could have many actions at the decision node
• Two or more actions may have equal expected value (then indifferent
between them)
• The probabilities might be subjective, estimates then maximise
subjective payoff (sometimes called decision making under
uncertainty).
Some assumptions
• The decision-maker ‘knows’ the tree (even if only subjectively).
• The decision-maker ‘knows’ the payoffs.
Some points to note
These are large assumptions, but trying to analyse a decision by trying to
construct the tree is often useful. Might show value where there is
complete uncertainty (i.e. can’t decide upon probability numbers).
Decision making under certainty is a special case where the probability
number from the node is unity on a single arc.
You should get into the habit of trying to construct decision trees. They
are a useful way of presenting possibilities when analysing problems.
Decision trees may have a number of decision nodes. Finding the optimal
solution is slightly more complicated but not too difficult. Starting at the
end of the tree, work backwards. Label the nodes in the following way: at
the probability node, calculate the expected payoff using the
probabilities given on the arcs leading from that node. This expected
value becomes the label for the probability node. At a decision node to
the left of the probability nodes under consideration, select the maximum
value of the labels of the probability nodes. The maximum becomes the
label for that decision node. The decision which generates this maximum
is the optimal decision at that node. Repeat that procedure until you
reach the starting node (moving to the left across the page). The label at
the starting node is the expected payoff obtained when the optimal
decisions are taken. Consider the example below and try to construct the
tree without looking at Figure 4.3
Example
Suppose the Chief Executive of an oil company must decide two things:
• first, whether or not to drill a site for oil
• second, if the company does go ahead, how deep it should drill.
It costs £160,000 to drill the first 3000 feet and there is a 0.4 chance of striking oil. If
oil is struck, the profit (net of drilling expenses) is £600,000. If she does not strike oil,
the executive can drill 2000 feet deeper at an additional cost of £90,000. Her chance of
finding oil between 3000 and 5000 feet is 0.2 and her net profit (after all drilling costs)
from a strike at this depth is £400,000. What action should the executive take to
maximise her expected profit?
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Introduction to business and management
0.4 oil
0.2 oil
600
400
-120
168
Drill
0.6 no oil
0.8 no oil
Drill 3000 ft
-120
168
5000 ft
- 250
Don’t drill
Don’t drill
-160
0
Figure 4.3 Oil exploration
Looking at the decision tree, and working from left to right, you can see
that the optimal solution is to drill to 5000ft (if oil not found at 3000ft).
Game theory model
Other theoretical approaches relate to more specific situations and
decisions, rather than applying generally to the process of decision
making. One of these is game theory. This is useful for approaching
decisions in management that involve two or more parties. It can be
particularly relevant to decisions involving competitors – other companies
who wish to trade in similar goods and services to similar customers. To
place this theory in its historical context, Neumann and Morgenstern
(1947) put forward a theory of zero-sum games and non-zero-sum
games.
In a zero-sum game, a gain by one party will result in a loss being
incurred by another party.
In a non-zero-sum game, it may be possible for the parties to cooperate to increase the benefits to all.
However, within this type of game, making decisions about co-operation
is difficult because it is unclear whether competitors will actually cooperate and to what extent. Therefore trying to predict the decisions of
competitors becomes important. Study and repetitive research into such
games has produced ideas about how participants may behave. One of
the best known examples is the prisoner’s dilemma which we will look at
later. But first we must look at some of the definitions and assumptions in
game theory.
Game theory is the study of how decisions interact and is a means of
analysing human (and animal) behaviour in the social sciences, politics,
biology and, most importantly, economics. Those of you who will go on to
study the Managerial Economics unit will realise how game theory is one
of the main tools used by economists today. Game theory is useful for
dealing with situations where outcomes depend on the interaction of
individuals, rather than decisions taken independently. The decision
making can be said to be strategically interdependent.
By strategically interdependent we mean:
• the outcomes of one player’s decisions are dependent upon the
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
decisions of other player and vice versa
• therefore, players need to take account of others’ decisions in making
their own decisions if they have an interest in the outcomes and are to
influence them accordingly.
Definition of a game
In defining the game, we must identify:
• players (individual/collective), at least two, who are characterised by
a particular objective function such as, for example, profit
maximisation
• actions available to each player under all circumstances – if you do
not know what all the possible actions are then you cannot specify
what can happen in the game
• strategies of the players, which are action profiles for each player
conditional on the actions chosen by the other players
• outcomes which are the end results of all possible combinations of
actions
• payoffs to each player, given the set of actions chosen by all players in
the game – pay offs are the rewards that the players derive from their
participation in the game – in business this is usually monetary profit
– but it need not be so.
These will become clear as we proceed.
Some basic distinctions in game theory
There are two branches of game theory, co-operative and non-cooperative
• co-operative theory assumes that communication and binding
(enforceable) agreements can be secured between players, everyone
shares the same objectives and is interested in the collective good
• non-co-operative theory makes no such assumptions – it is
concerned with situations where individuals are assumed to have selfinterested motives
It is usually accepted that non-co-operative theory is fundamental since
co-operative games can be reduced to non-co-operative games (by
modelling the establishment of binding agreements).
One-shot and repeated games:
• in the one-shot situation a game is played once.
• in repeated games they are played more than once – perhaps an
indefinite number of times.
We shall, in this introduction, only consider one-shot situations, though
repeated games are very central to management theory. You might refer
to any introduction to game theory if you want to take things further.
Assumptions of rationality
Game theory usually starts by assuming rationality. By this is meant:
• players maximise expected return (utility)
• players assume others playing are also rational
• players assume that others assume they are rational, and so on.
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Introduction to business and management
Equilibrium
The object in game theory is usually to identify equilibrium outcomes to
particular games. An equilibrium is a proposed solution of a game – it is a
combination of strategies that are believed most likely – so, in fact, they are
predictions. It is useful if we can identify a small number of equilibria for
all the possible outcomes – ideally we would like to find a unique
equilibrium. We could then use it as a prediction of what would happen if
the game was in fact played. There several different types of equalibria in
game theory. We will be looking at three, namely the Dominant Strategy
Equilibrium, the Nash Equilibrium and the Pareto Equilibrium. These
equilibria will be explained as we meet them in the examples.
Structure of the game
There are two alternative ways of depicting the structure of a game:
• games in extensive form
• games in normal (or strategic) form.
Extensive-form games
We start by introducing the basic ideas of games in extensive form. They
are best introduced by elementary examples. Consider first a situation
where two players, P and A, decide upon a joint venture. Each has two
possible actions (moves):
1 to co-operate (involving costs)
2 to slack (reducing costs).
We can model an interdependent decision tree as shown in Figure 4.4
Outcome
c
c
Both co-operate
A
P co-operates
A slacks
s
P
s
c
A co-operates
P slacks
s
Both slack
A
Figure 4.4 Interdependent decision tree
As the model stands, however, we can make no predictions without some
idea of the preferences of P and A over outcomes.
The tree is almost self-explanatory. P is described as the first mover and
A as the second mover. Games could be much more complicated with
repeated moves and, indeed, more than two players. In this simple model
both P and A have two possible actions (s and c each). It should be clear
to you that players could have any number of actions and, indeed,
different sorts of actions.
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The tree gives, as it were, the logically possible combinations of actions
and the outcomes are described here in an obvious manner; they derive
from tracing the ‘path’ through the tree.
So we now assume, not unreasonably, that the outcomes are valued as
follows (payoffs).
c
c
P
A
3
3
1
4
4
1
2
2
A
s
P
c
s
4>3>2>1
A
s
Figure 4.5 Game 1
This is the same game as in Figure 4.4 except that the ranking of the
outcomes for both P and A are now included. So, for instance, P’s best
outcome (scored 4) is for her to slack and for A to co-operate. This is
known as a non-zero sum (or variable sum) game because the
payoffs for any outcome are not such that what one player gains the
other loses (we assume for this idea that the numbers not only rank the
outcomes but can be added and subtracted).
The question now is, what will happen in this simple situation? The basic
idea is to think forwards, reason backwards, although this does not
always work.
Now A will choose s whichever node he is at. This is because s is known
as a dominant strategy for A, being the choice at both nodes. (When
all players have a dominant strategy, this is said to be a Dominant
Strategy Equilibrium.)
P will then choose s because 2 > 1.
ss is what is termed the Nash Equilibrium. It is the prediction of what
rational decision-makers will choose. P can think ahead and note that A
will choose s, and she will thus also choose s.
A Nash Equilibrium is a combination of strategies (one for each player)
which has the property that no player has an incentive to choose another
strategy if the other players also choose their Nash strategies. This game
has one unique Nash Equilibrium (both slack). Note that the cc
combination could make both players ‘better off’. Both would acquire 3
rather that 2 units of value. cc is the Pareto Equilibrium, though ss is
the Nash Equilibrium. Much of management theory is concerned with
how to move interactions from the Nash to the Pareto Equilibrium. A
Pareto Improvement is a change that makes at least one individual better
off without making the other individual worse off. We reach Parento
efficiency when no further Parento improvements can be made.
This game has a number of noteworthy characteristics.
1 It is a game of complete information. Roughly speaking, this
means that both players know the structure of the game (the tree) and
each other’s payoffs. Imagine what might happen if the players did not
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Introduction to business and management
know each other’s payoffs!
2 It is a game of perfect information. This means that the players
know what choices have been taken in the past (the history of the
game). So A knows whether P has chosen c or s. Note that if P (by
mistake, shall we say) chose c, then A would still choose s (and
receive 4 units of value).
3 You should satisfy yourself that the same outcome (Nash Equilibrium)
will result if A is the first mover rather than P. There is no first
mover advantage.
Now consider what might happen if the ranking (value) of the outcomes
P
A
changed as shown in Figure A5.
c
3
3
2
4
4
2
1
1
A
c
s
P
c
s
A
4>3>2>1
s
Figure 4.6 Game 2
What will happen now? You should think forwards, reason backwards.
A will choose s at upper node and c at lower node.
P will anticipate this and choose s.
(s,c) is the Nash Equilibrium.
If A moved first, he would get the 2,4 result.
There is first mover advantage.
Again, this is a game of:
• complete information
• perfect information.
We will now consider games with imperfect information.
P
A
3
3
c
A
s
P
1
4
s
4
1
c
A
s
Figure 4.7 Revert to Game 1 (Game 1a)
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
You should now note the dashed line (called information set). This is
a convention which indicates that A does not know the history of the
game (whether P has chosen c or s). Alternatively, A and P may decide at
the same time.
What will happen now?
• A will still choose s.
• P will still choose s.
We obtain the same result as before (the ss Nash Equilibrium).
This, however, is not always true. You might consider Game 2 with
imperfect information.
Games in strategic form
We now turn to the definition of games in normal or strategic form.
Consider Game 1a. Both P and A have two strategies, c and s.
The normal form is a matrix as follows:
A
P
c
s
c
3,3
1,4
s
4,1
2,2
Here the rows represent the strategies of P and the columns those of A. In
each cell of the matrix the first number (by convention) is the payoff of
the row player and the second that of the column player. You should be
able to see how to move from the extensive form of the Game 1a to the
normal form. We know, of course, that the Nash Equilibrium is at ss (the
bottom right hand-corner of the matrix).
You can find the Nash Equilibrium in the normal form as follows:
• if A chooses c, then P will choose s (4 > 3)
• if A chooses s, then P will choose s (2 > 1).
Now:
• if P chooses c, then A will choose s (4 > 3)
• if P chooses s, then A will choose s (2 > 1).
Then ss is the Nash Equilibrium.
Now consider Game 1 again (perfect information). A strategy in a game
for a given player is a complete specification of what he or she may do
under all possible circumstances.
In Game1, P has two strategies, c and s respectively. A, however, has four
strategies:
• c if P does c and c if P does s, cc
• s if P does c and c if P does s, sc
• c if P does c and s if P does s, cs
• s if P does c and s if P does s, ss.
The game in normal form is given by:
A
P
cc
sc
cs
ss
c
3,3
1,4
3,3
1,4
s
4,1
4,1
2,2
2,2
You should be clear using the procedure that s,ss is the unique Nash Equilibrium.
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Introduction to business and management
The prisoner’s dilemma
This is a common example of game theory and describes a game or
situation when to act in self-interest will have negative results for both
parties, whereas to co-operate can have positive results for both.
This dilemma arises from two criminals being arrested. They are held
separately and have no way of communicating with each other. When
questioned they have several options which all have differing
consequences. If one of them were to confess then the other would
receive severe punishment. If neither confessed they could be set free.
The dilemma therefore is based on whether to hope that you will both
say nothing or whether it would be best to confess before the other does
and so receive less punishment.
Can you see how this could relate to decision making within a business context? You
might need a paper and pencil to think up a scenario - though do not spend too long on
this.
One possible situation could be if a company (Business A) was deciding
whether to update an existing product with the latest technological
innovation – say a new car engine that uses a new type of fuel instead of
petrol. This could be costly. Let us say that Business A has one major
competitor, Business B. The options available are as follows:
1. Business A updates to new type of fuel and Business B does not
2. Business A does not update but Business B does
3. Both Business A and B update to new type of fuel
4. Neither Business A nor Business B updates.
The first three options would involve one or both businesses incurring the
cost of updating. The first two options have the risk for each business of
losing customers by becoming uncompetitive in comparison to the rival
who updates when they do not.
However, the final option could be beneficial to both Business A and
Business B, since no costs would be incurred and their competitive status
would remain the same.
The next question is: would either business be prepared to trust the other
and co-operate to achieve this benefit? If this did happen, how long
would the co-operation last for?
Clearly, risk and trust are important factors when analysing business
decisions using game theory.
Using game theory in strategic decision making
Activity 4.7
Can you identify any problems with the application of game theory to strategic decision
making?
Think back to your evaluation of the classical and bounded rationality models: are any of
the problems with those approaches relevant here?
How helpful do you think game theory could be to a manager facing a dilemma, and in
what sort of situation do you think it could be most useful?
So to recap, game theory is applicable to certain situations, but only
where two or more parties will be in conflict of some sort. However, even
for the situation above, rational behaviour is assumed. Decisions are
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
based on predictions of how the opponent or competitor will behave, and
these predictions will be dependent on the evaluation of possible options
and outcomes for each party – assuming that each will choose the
rational choice to bring optimal benefit.
Therefore, some of the limitations of the rational model of decision
making are relevant. For example, managers will not always have the
time or information to develop predictions of competitor behaviour.
Despite this, game theory does offer a useful approach to understanding
organisational decisions within a competitive environment. This is not
only relevant externally with other businesses, but can also be applicable
within an organisation. An internal example of this would be between
managers competing for increases in their own departmental budgets.
Thinking again about how game theory is relevant to business, Miller
(1997) demonstrates how the study of game theory can also be useful for
making decisions about incentive schemes for employees. For example, if
a work group is offered a reward for increased team effort, then each
worker has to consider the likelihood of the other team members working
harder to earn the reward.
If an individual is the only one in the group to work harder, so that the
group as a whole does not improve much and they fail to gain the
reward, what does that mean? It means that the individual’s extra effort
was wasted.
On the other hand, if the team co-operates and all members work harder
and are rewarded, then they all benefit. It follows that the greater the
expectancy of group members that everyone will work harder – and
therefore the greater the probability of winning the reward – the more
likely it is that each individual will work harder. This is an example of
expectancy theory (Vroom’s Expectancy Theory) and an important
approach to motivating staff. For more on this, see pages 490–492,
Mullins, 2005.
For further description of game theory in relation to business decisions,
see the Further reading suggested at the beginning of this chapter from
Managerial Dilemmas by G. Miller (1997).1
1
Recommended reading
4.4 Aids for making strategic decisions
There are other aids (also called tools or techniques) to help managers
make strategic decisions. As technology has evolved, more statistical
decision-making models have become available as risk analysis can be
done via increasingly sophisticated programming. Some of these
contributions assist with the gathering of information, some with analysis
of information to generate possible decisions, and some with the
prediction of outcomes to help select the most appropriate decision.
SWOT
SWOT analysis is a simple tool, much used to gather information on the
current situation of an organisation. You can read more about SWOT on
pages 159–160 in Mullins, which was part of your reading for Chapter 3.
Different elements of the situation are evaluated within the categories of
strengths, weaknesses, opportunities and threats. It is important to consider
only the major elements within each category, otherwise the tool is less
useful for deciding what strategy can be matched to the needs of the
situation. These elements are represented on a chart such as Figure 4.5.
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Introduction to business and management
Strengths
Opportunities
Weaknesses
Threats
Figure 4.8 SWOT analysis
Have a look at the example in Mullins for a completed SWOT.
You can set out the four components how you wish. Here the positive
factors (S, O) are across the top and the negative factors (W, T) across
the bottom. Note also that here the factors internal to the organisation
(and therefore under its control) are on the left-hand side (S, W) whilst
the external factors (outside the organisation’s control) are on the righthand side (O, T).
Can you see how this grouping of the four headings helps frame a discussion about
strategic direction? Think for a few minutes before reading on.
It helps two approaches to formulating strategy. The first approach is to
consider the business and what it can offer (S, W) and then look at the
external environment (Chapter 7 of the guide) to see what a strategy can
target (O, T). This is sometimes called an ‘inside–outside’ approach to
strategic thinking. You can see what an ‘outside–inside’ approach would
be, though it is less common.
Are the factors static or changeable? Think how you can use SWOT as a dynamic tool to
help strategic thinking.
They are changeable. First the factors are all changeable. Second, once
factors have been identified, good management will take steps to
strengthen weaknesses, capitalise on strengths, target opportunities and
either turn threats into opportunities or avoid them.
This will also be relevant to the next section of the unit, concerned with the
business environment, because the SWOT analysis offers an evaluation of
the opportunities and threats presented by environmental factors. Once the
analysis has been done, the main problem can be identified and understood
within the context of the overall position of the business.
Activity 4.8
Try your own SWOT analysis.
Think of a business that you are familiar with. Draw up a SWOT analysis for them, or use
the example of your college or workplace.
Make a list of the decisions relating to the proposed change that could be helped by the
information provided by this tool.
Other aids
Another tool of this type is specifically aimed at assessing the current
situation of the overall business when it involves different areas or
products. This is the Boston Consulting Group matrix, and offers a
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
view of the different parts of a business in relation to one another, the
business portfolio.
Each part is seen to require an appropriate strategy and so these are
referred to as strategic business units. Each unit is seen as independent in
that it needs its own strategy to include appropriate mission, goals,
customer type and product.
This approach can provide management with an overview of how these
different units fit together to make up the overall portfolio, and so can be
helpful in making strategic decisions. Each business unit is analysed in
relation to market growth and market share, and so allows them to be
displayed visually within a matrix and different labels are given to units
or products with different characteristics.
Other qualitative techniques that can be used for gathering
information are focus groups and brainstorming sessions. These
involve managers getting groups of people together to gain information
on a current situation, opinions on a certain topic – perhaps a possible
course of action or the performance of a product – or they can also be
used to generate possible solutions to a problem.
Once the situation has been evaluated, all possible information gathered,
and alternative solutions generated, aids are available to help the
manager decide which will be the best option. One of these is
simulation. This usually involves computerised programmes to run a
series of simulation trials to predict the likely outcomes of different
decision possibilities.
An example is queuing theory, where the need for equipment or staff
may vary and is partly due to chance. Simulation in this case would allow
a manager to test out possible strategies – say for the scheduling of
machine use, via the use of past experience of when demand is greatest –
and in addition would use subjective probability for times when
experience cannot be drawn on. Therefore, although the information
gained is not perfect, it can contribute to the other factors that will help
the manager make the most appropriate decision. Another aid of this kind
is the decision tree which you have already come across earlier in the
chapter. This can be used to trace the possible consequences of making
different decisions.
Activity 4.9
Draw your own decision tree.
Can you think of decisions where the possible outcomes and their consequences can be
represented on a decision tree? Think about decisions you make yourself – for instance,
how you will celebrate your birthday or choose a holiday destination for yourself – and
also ones that managers are faced with – how a manager, for example, decides between
hiring transport for his goods and buying his own trucks.
Draw out your own tree for one of these. How can this help you to make your decision?
It can be seen then that many different theories, models and tools have
been developed to help managers make decisions. Why is this so
important?
Research by Nutt (2000) suggests that, in reality, the decisions made by
managers are often of poor quality. The main reasons given for this are:
• a focus on the short term
• a tendency to implement solutions that have the least risk and have
perhaps been used before.
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Introduction to business and management
These reasons can be related to the development of strategy. In Chapter 3
of this guide, research was presented that suggested managers do not
have time for many planning activities and often spend time dealing with
small problems that arise on a daily basis and need immediate solutions.
When evaluating these approaches to strategic decision making, then, it is
important to relate them to the workplace and the constraints managers
face.
Activity 4.10
Reading
Read the following chapter from the secondary key text:
• Daft (2003) Chapter 8 ‘Strategy formulation and implementation’.
As you read this chapter, think about the realities of the manager’s job. Evaluate the
value of the theories and their relevance to strategic decision making within the
constraints of workplace pressures.
The remainder of this chapter will focus on a particular area of decision
making, that relating to organisational change.
4.5 Organisational change and development
Change is one of the only constant factors regarding the behaviour of
organisations. Why do you think organisations change? It is useful to
distinguish between two different types: change that is planned and
change that is unplanned or forced.
• Planned change is related to the discussion in the first part of this
chapter, because making strategic decisions about the direction of the
company can often involve initiating change.
• Unplanned change may also involve making strategic decisions, but
these are decisions forced by particular circumstances rather than
being the initiative of the top managers.
The need for either type of change is strongly related to the business
environment, since organisations operate within changing and sometimes
turbulent conditions. Planned change can be used to attempt to overcome
potential problems and to create the best fit between the organisation
and the environment, whereas unplanned change can be necessary to
react to and cope with external changes that are beyond the control of
the management. In Chapter 6 we will be examining the internal
environment of the firm, and in Chapter 7 we will focus on the external
environment. However, here it is useful to consider the factors that can
contribute to the need for organisational change.
Activity 4.11
Think about the organisations that you know or have been part of. How have they
changed during the time you have know or belonged to them? Was this planned or
unplanned change?
Think of an example of when strategic change may be forced and an example of when
this could be planned. Make a list of the factors that could initiate the need for an
organisation to change.
Cole (2000) categorises the possible triggers for change as either
internally or externally located. However, it is important to recognise that
some of the triggers will have greater impact than others, and also there
are differences in the level of predictability which affects whether
management can plan for them or not. External triggers may include:
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
• changing demand for goods and services
• threats from the competition, such as the updating of a product
• the entry of a new competitor
• the threat of takeover by a larger company or a merger with a
competitor
• problems in the supply of materials needed for production
• financial changes such as interest and currency exchange rates
• lack of skilled labour
• changes in the technology available
• political and legal changes which affect the regulation of behaviour.
In addition to these, triggers of change that may be internal, initiated
within the business organisation, could include:
• planned strategic change
• introduction of changes to organisational culture
• need to improve production efficiency, quality, supplier relations, use
of personnel
• the development of a new or improved product.
How similar are these triggers to the list you made during the last exercise?
It seems, then, that organisational change can be planned or forced
(unplanned), and that it can be triggered by a wide variety of both
internal and external factors. These elements of the business environment
will be the focus of the next section of the unit, which will also include
an examination of organisational culture. Once you have studied this you
should be able to link it back to the importance of organisational change.
However, we also need to consider the nature of change itself, as the
changes we are discussing can involve varying levels of significance for
the operations of the organisation.
Change that has the most impact is that which will transform the
organisation, because in its current form the business would not be able
to cope with the change. Less dramatic change can be described as
incremental, involving the organisation continually adapting its strategy
to cope with the changes and pressures faced. Therefore the different
types of change that can be experienced by an organisation can be
represented as in Figure 4.9.
Type of strategic change
Management role
incremental
transformational
proactive
tuning
planned transformation
reactive
adaptation
forced transformation
Figure 4.9 Types of strategic change
Source: adapted from Johnson and Scholes, 2005, 497
Organisational development
One particular way of understanding the proactive incremental type of
strategic change is provided by the concept of organisational
development (OD).
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Introduction to business and management
You can read about OD in Mullins at the beginning of Chapter 22, pages 888–91. Once
you know what it means, read on here. Note on page 889 how Mullins cleverly
integrates six ideas about organisations around the theme of improving performance
(Figure 22.1).
OD can be viewed as a specific sort of strategy, and although it can be
defined in many ways, again several common elements can be found in
most definitions. OD is seen to be important because it is a process that
involves the whole organisation. The development of the organisation
involves planning and the conscious implementation of incremental
changes; the approach of the behavioural sciences is therefore important
for understanding the human element of developments.
OD also usually involves a third party to act as the change agent. This is
the person or group of people responsible for initiating the change, and
usually for implementing the changes decided on. For the specific
approach of OD this agent may be a special consultant or corporate team;
however, for the initiation of organisational change more generally it is
likely that managers will act as change agents.
The manager’s role in organisational change is a very important one.
Even if an OD expert carries out some stages, management would still
have initiated this process and they would be involved throughout.
Activity 4.12
What does organisational change mean for a manager?
1. What different types of roles do you think a manager would need to play? It will
be useful to think back to Chapter 3.
2. Thinking back to the triggers discussed earlier, can you identify any that a
manager would be the first to become of aware of and so initiate change? One
example would be a production manager recognising the need to change the
relationship with a major supplier if it was not running smoothly. Can you think
of another?
Feedback
Depending on the type and level of the manager, it is possible that he or she may be
involved in many different roles. These could involve leading change, motivating
employees during times of change – with communication being particularly important –
and also controlling change as much as is possible.
4.6 Managing the change process
Because change is such a pervasive element of organisational life,
attempts have been made to develop models and theories to assist in
managing the change process. This is by no means a new phenomenon,
although it can be said that the environment of the organisation is
becoming ever more turbulent and increasingly unstable. In Chapter 8,
for example, we will be considering the impact of globalisation.
From the perspective of social psychology, Lewin (1951) offered a view of
change that involved three major steps.
1. The first is unfreezing, and refers to the process by which the forces
which support existing behaviour in the organisation are reduced.
2. The second stage involves moving, where new responses are
developed based on new information. This can include new
behaviours, approaches, values etc.
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
3. The final stage is then refreezing, to establish the new behaviours as
accepted and established practice, processes or values within the
organisation.
What is your evaluation of this? Can you see any problems with each of the stages? The
final part of this chapter will consider these in more detail.
Different ways of managing change
Another approach put forward, stresses the importance of management
style. This suggests that different managerial styles each have advantages
and problems, but the most important factor is to adopt a style that best
suits the organisation, the manager and the change being implemented.
Johnson and Scholes (2005, 511) have developed the following typology
of ways of managing change (called by them ‘styles’).
• Education and communication – where management spend time
explaining the problems being faced and the strategy for overcoming,
but this can be time-consuming.
• Collaboration/participation – where employees or special groups
of them are involved in setting the strategy, but again this can be timeconsuming.
• Intervention – parts of the change are delegated and different
agents co-ordinate the process, so it is controlled but still participative.
• Direction – change is conducted through the use of authority, but
employees are less likely to accept this.
• Coercion/edict – change is forced through the overt use of power,
but again employees are less likely to accept this unless in a crisis
situation.
Clearly it might be sensible to combine some of these styles in a change
situation.
Organisational Development (OD) model
The OD model of managing change has six key stages, which are set out
by Cole (2000).
1. Preliminary stage – this will involve top management in
discussions with the change agent to decide that change is needed
(the OD approach usually uses an external change agent).
2. Analysis and diagnosis – during this stage the change agent will
evaluate the current situation and gather necessary information,
possibly through research such as interviews with employees and
managers. The managers and change agent will then determine the
diagnosis from the information gathered.
3. Agreement about aims of the programme – the aims and
objectives of the change programme will be deliberated and decided
upon.
4. Action planning – this stage involves planning the actions needed
to implement the change and the plan of their timing and order.
5. Evaluation and review – following initial implementation, it is
necessary to monitor and frequently review the strategy for change. In
the longer term, monitoring is necessary. Also it is advisable to carry
out major reviews to measure the achievement of the goals.
6. Revised aims and plans – the degree of revision needed will be
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dependent on the findings of the reviews and if any aims of the
programme are altered then it will be necessary to also adapt the
plans. Once the programme is stable and major revisions undertaken,
the change agent (third party) will no longer be involved.
This approach to managing organisational change can also be relevant
when a third party is not involved, but where the organisation’s managers
are the strategic decision-makers. The view that organisations need to
continually change and adapt to different environmental factors is also
taken up by the concept of the learning organisation, which will be
explored in Chapter 9 of this guide.
Total quality management (TQM) and business process re-engineering
(BPR)
Have you heard of either of these systems before? What do you think they mean in
relation to organisational change? Think for a few minutes before reading on.
Well, both involve a radical redesign of organisational operations, when
change will impact every area of the organisation.
Activity 4.13
Reading
Turn to the following section of your main key text:
• Mullins (2005) Chapter 23 ‘Management Development and Organisational
Effectiveness’, pages 964–71.
You can read about TQM on pages 964–68 and about BPR on pages 968–71.
Also look at the article reprinted in Mullins on page 91–92, Exhibit 3.2. This gives an
interesting view of the fashion for new management ideas, especially TQM and BPR.
1. Once you have read these sections, study the diagrams on pages 967, Figure
23.5, and 970, Figure23.6. What roles can you identify for the managers within
the organisation during the implementation of:
– TQM?
– BPR?
2. From your evaluation of the models of change management you have studied in
this section, what problems do you think could be experienced when trying to
use them within a business?
4.7 Managing resistance to change
One of the greatest challenges for managing change is the resistance it
encounters. This resistance mainly comes from the employees of the
organisation, but can also come from customers, suppliers etc. The extent
of this problem will be determined by each individual situation and by
the type of change being implemented. However, a range of approaches
and techniques are offered to help managers and change agents
overcome this resistance.
Making change acceptable
Activity 4.14
If an organisation that you belonged to announced that it was going to implement
radical change, what do you think your initial reaction would be? What would make you
more accepting of this?
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
Do not read on until you have thought about these questions for a few minutes, and
made a note of your main thoughts.
The questions you have been considering are ones asked by researchers
who try to develop ways of implementing change that will create the
least or no resistance. Most resistance is experienced when employees
feel that their goals are in conflict with those of the management.
Therefore change can be seen by employees as a threat to their job
security, status or established patterns of behaviour. If a feeling of distrust
and suspicion develops, then even if the goals of each party do not
conflict, the employees may still feel threatened. The problem of
uncertainty also contributes to this, as the need for change is often
triggered by a turbulent and unstable business environment, and so
disruption to work patterns can compound the feeling of uncertainty.
However, Woodward (1968) stresses that this resistance is actually a
‘natural’ process that needs to be understood. If a threat is perceived from
the change, then the natural reaction is to resist the change.
Understanding this can assist in the planned implementation of a change
programme, because resistance can to some extent be expected and so a
strategy put in place to ‘manage’ the resistance.
Lewin (1951) again contributes to this debate, by offering the technique
of forcefield analysis. The aim of this is to provide a framework for
analysing the major forces of resistance that are likely to emerge from a
programme of organisational change. The stages involved are as follows:
1. Analysis of the forces that will affect the change to the new
organisational state or condition. There are seen to be two types of
forces: restraining ones, such as the response of the people who
disagree with the need for change, and the driving forces of the change.
2. Assessment of which of these forces is most important.
3. Action needs to be taken to reduce the most important restraining
forces and to increase the most important driving forces.
A number of possible methods and considerations can then be put
forward, as to how managers can reduce the negative effects of change.
See if you can think of some of the possibilities for few minutes before reading on.
The definition of objectives is important, and clear communication of
these is vital. If employees understand the need for change, how it will be
implemented and the effects it is expected to have, then the fear and
threat of the unknown will be reduced. Employee involvement wherever
possible can also be seen to contribute to the employees ‘ownership’ of
the change, such as asking for comments on the current situation or
suggestions for possible solutions. The aim of this will be to gain greater
employee commitment to the changes. The timing of the programme will
also be important, again with the employees being made aware of what
this is and why. Finally, it may be helpful to build in a number of shortterm goals, where improvements will be visible. The aim of this is to
demonstrate to employees that the change programme will have positive
and measurable benefits. The overall mission for managers of strategic
change, then, is to decide what the most successful changes will be and
how to implement them, whether transformational or continual.
However, these managers also have the responsibility of delivering
strategic change in a way that creates, not resistance, but commitment.
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Introduction to business and management
Activity 4.15
Reading
Read the following section of your main key text:
• Mullins (2005) Chapter 22 ‘Organisational Development’, pages 909–33.
As you go through this reading, think abut the different decisions that will have to be
made during each stage of organisational change. It may be useful to have a particular
organisation in mind to help you evaluate the contributions you read about. You should
read the chapter synopsis and try the Critical Review question to help you consolidate
what you have learnt. Bear in mind that we will be dealing with organisational culture
later on in this unit.
Chapter review
Case study exercise
Reading
Read the following section of your main key text:
• ‘Case study: It’s tough at the top: managing conflict in the Wakewood
Organisation’ in Mullins (2005) Chapter 22, page 933.
Complete the tasks, but do not focus too much on review of the organisation structure, as
we will learn more about this in Chapter 6.
1. Read the case again and write a few lines about the approaches of the chief
executive and the general manager. Now, looking at your strategy, what impact do
you think the approaches of these two individuals could have on the success of
your strategy?
2. How well have you accounted for the human and social factors discussed in Mullins?
3. Looking at the external and internal pressures set out in the case, which are the
most difficult to overcome? Does your strategy for change fully account for these
pressures?
4. Now that you have attempted to develop a plan for change, how did you find the
task? What types of decisions were important to prepare the plan and what sort of
decisions do you think could be required if the plan were to be implemented?
Key points
• Decisions can be categorised into different types, which are associated with
management at different levels in the organisation.
• A business strategy gives direction to an organisation and also provides a guide
for subsequent decision making.
• Models for strategic decision making can assist the manager in this process;
however, each model has limitations and makes assumptions that may not be
applicable.
• Environmental factors and conditions have a direct influence on the decisionmaking process, and these can also trigger the need for organisational change.
• Organisational change can take many forms and as this is faced by all
organisations, models for implementing change programmes are important despite
their limitations.
• The main challenge of change management is to overcome resistance to strategic
change, and so management of resistance has to be an integral part of the
programme.
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Chapter 4: Theoretical approaches to strategic decision making and organisational change
Sample examination questions
When considering these, please remember the guidance given in the
Introduction about examination preparation. Each question can be
answered fully in approximately 45 minutes, under examination
conditions.
1. Why is strategy important to the business organisation? In your answer
consider the decisions needed for the formulation and implementation
of a business strategy.
2. How might a management team go about implementing strategic
organisational change? Discuss the main problems they could face and
strategies to overcome these.
3. What aids and techniques are available to assist managers at different
stages of strategic decision making? How are these useful?
4. Why might models for strategic decision making and the management
of change be of limited use in practice to a manager?
Advice on answering a question
To help you further with your exam preparation we offer below some
suggestions for one of the answers. However, it is very important to
remember that there is no model or correct answer to any of the
questions. It is more important to demonstrate what you have learnt by
developing your own response to the question, supported by evidence
from the relevant parts of the chapter.
1. Why is strategy important to the business organisation? In your answer consider the
decisions needed for the formulation and implementation of a business strategy.
The concept of strategy is central to this question, so the essay would
begin by exploring this and offering a definition.
The concept could then be linked to the business organisation and with
ideas of organisational mission and goals.
Different stages in the formulation of a strategy could be considered in
turn, and at each stage the type of decisions needed could be discussed.
For example, it might be useful to evaluate the organisation’s current
situation. This would include looking at the aids that could be used to
understand this. If a SWOT analysis were done, then decisions would need
to be made as to what the organisation’s strengths, weaknesses,
opportunities and threats are. A brief evaluation of the use of these models
can add a critical dimension to your essay.
When considering implementation, it would be helpful to identify the
problems that could be faced by management and what the limitations of
strategic decision-making models may be, such as the assumptions they
make. The decisions to be made here could concern how to overcome the
problems faced – possibly linking this to management of organisational
change.
Any answer should include references to the main types of models and
some of the main authors you have read about.
As the main question is concerned with the importance of strategy, it
would also be helpful to consider the consequences of not having a
strategy and of avoiding strategic decisions.
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