Strategy Dynamics Briefing 68: ‘Policy’ to control strategy

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Given the very wide range of performance outcomes that can arise from small differences in key decisions in examples from earlier briefings, a disciplined approach to decision-making would seem valuable. We previously described the strategic architecture of resources as “the machine” designed to fulfill the organization’s purpose, and like any machine, this one too needs a control system if it is to perform well.

The machine analogy is more complex when human behaviors are involved, because unlike the physics of mechanical systems those responses are not entirely certain. However that is no reason to abandon any attempt at managing logically those parts of the system that are more predictable, or at using what limited predictability can be found in the behavioral parts of the system.

Human beings operate many kinds of system, from the temperature control on their shower to the more complex challenge of flying an aircraft. Recognizing that some skill is needed to do these tasks successfully, we help ourselves with automated mechanisms to do some or all of the controlling for us. A thermostatic valve keeps the temperature of our shower just right, and whilst pilots may know how to fly a plane, it is more convenient and reliable to have an autopilot do much of that task for them.

Some automated systems are utterly simple. Take the thermostatic control of your shower. All it needs is to be told the temperature you want and the current temperature, plus a simple rule — if the actual temperature is less than desired, swing the valve towards the hot inlet, otherwise towards the cold. A car’s cruise-control system is similarly simple — if the vehicle speed is less than desired, step on the gas; if faster, ease up. Some management decision rules are similarly simple: Fixed decision rules, such as “Keep the price at $100, whatever the situation” may seem an unlikely kind of rule, but is remarkably common. Organizations often operate a head-count limit for certain departments such as “You may not employ more than 50 sales staff, under any circumstances.” A budget is effectively a rule saying “You may not spend more than $X 000 next quarter [under any circumstances].” A cleverer version is the fixed-percentage rule – spend X% of revenue on marketing, or spend no more than Y% of revenue on labour. Such rules are certainly simple, and reflect a focus on maximizing profitability ratios, rather than growing absolute cash-flow [or other performance indicators].

These rules may be very simple, but they illustrate (figure 1) the key elements of a decision to control strategy:

  • a target value for some measure in the system
  • the current value of that measure
  • a rule for choosing a value for the decision item, using the information on the target and current value of the measure
  • the actual value chosen for the decision
  • various consequences for other items in the system caused by the decision

Figure 1: Generic structure of a policy for making a decision on some item. (Click image to view larger)

Generic structure of a policy for making a decision on some item

The policy is informed by data about the situation, and the decision that emerges from the policy works by affecting one or more other items in the system. Each policy is therefore an integral part of the strategic architecture itself. Some further details should be clarified:

  1. It is not possible to base a decision for the current period on information in this same period. Rather the decision is always for some future period of time. The period concerned may be very short, or even ultra-short, as when an airline’s systems set the price for the next ticket on the basis of the latest availability of seats on a flight.
  2. To overcome problems arising from this delay, decisions may be based on forecasts for some measure, rather than the current value. A store selling ice cream, for example, might set its orders according to a forecast of next week’s weather.
  3. It is not in fact possible for management to make decisions about the level of a resource, e.g. how many sales people we will have next month. Since the level of a resource can only be altered by its inflow or outflow, it is those items that the decision must actually affect – i.e. how many to add or remove.
  4.  

    Until next time…

     

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    Increasing automation of ‘management’

    History shows a rising penetration of organized control systems into more and more parts of the business system. We gave up long ago any attempt to control oil refineries by having operators look at thousands of dials and indicators and then use just their skill to decide whether to open or close valves, start or stop pumps, and so on. Logistics systems that were once managed by the skilled intuition of senior distribution managers are now largely computer-controlled.Strategic Management Dynamics book coverCustomer service that was once left to the skill of service department managers is now directed by customer-relationship-management systems (CRM). Systematic decision-making is even encroaching on issues with substantial behavioral dimensions, such as the lending decisions for banks that were once made on the basis of individual managers’ personal assessment of each loan applicant, but now rely almost entirely on credit-scoring systems. The sub-prime lending crisis of 2006-09 showed how badly things can go wrong if we abandon reliable systems in favour of gut-feel.

    This briefing summarises material from chapter 8 of Strategic Management Dynamics, pages 533-538.

    Read more about the book on our website

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