Strategic Analysis and Choice

1. Introduction

In this assignment, I shall attempt to critically examine the strategic decision making process in the organization that I am working for, which is Arab National Bank, in Riyadh, Saudi Arabia, in order to determine whether the organization’s strategic decision-making process could be considered rational or not. I am going to give a brief overview about the bank, models of decision-making, decision and system thinking, the strategy decision-making, the relation between the psychology and decision-making and prescriptive schools. After that, I will critically examine the strategic decision making process within the bank by taking some examples of decisions. Because I am working for a strategic business unit (SBU), which is the Investment Services Group, the core for my examination will be the business and functional strategy. Rational or irrational is what I shall determine and I will justify my answer. Finally, I will write my conclusion indicating the limitation of the sample.

2. The Organization (Arab National Bank)

Arab National Bank is a joint- stock company established in 1979, by changing the ownership of Arab Limited Bank’s branches in Saudi Arabia, owned 60% by Saudi citizens and 40% owned by a foreign partner. Its mission statement is ‘Financial solutions for a better life’. Its objective is to offer the best financial services that satisfy the customer’s needs and to make continuous growth on the return of the capital employed by the shareholders. The market is very attractive; Arab National Bank is one of the strongest in the industry, and wants to invest its best resources in support of their offering.  The bank is following Michael Porter’s 'generic' strategy, which is A Focus Strategy (1). The bank has many strategic marketing alliances. Our strategy is the Market- Challenger Strategy. Arab National Bank’s strategic objective is to attack the market leader. The following table shows the growth in the bank’s business.

	1st Half 2003	1st Half 2004	% Growth
Net Profit	377 Millions SAR	576 Millions SAR	53%
Return on Equity	18.8%	26.6%	41%
Return on Assets	1.68%	2.19%	30%
Loans	17,547 Millions SAR	24,460 Millions SAR	39%
Customer Deposits	31,457 Millions SAR	37,834 Millions SAR	20%
Provisions Coverage Ratio	113%	154%	36%
Market Capitalization	11,340 Millions SAR	19,190 Millions SAR	69%

(3.75 Saudi Riyals (SAR) = 1 US Dollar)

3. Decision Making

3.1 Models of Decision Making

Before I proceed writhe the models of decision-making, we need to understand the definition of it. Decision-making is weighing up the relative attractiveness of each alternative (2). There are two types of decisions, programmed and non-programmed. The programmed are made frequently, the non-programmed are made infrequently. There are different models of decision-making but some of them are based upon highly structured idealisations about how rational decisions should made. Rational refers to the idea of consistency. In other words, if the same amount of information is presented to two different decision makers in two different places and both of them act rationally, their decisions would be the same. However, we must take into consideration that what is rational with one decision maker could be irrational with another. Essentially, decision models are classified as:

• Rational model

The rational model is the model that gives the decision makers clear steps to choose the best choice.

• Bounded rational model

This model is based on the decision maker accepting a solution which is good enough rather that the best.

• Evolutionary model

Henry Mintzberg observed the way in which decisions are actually made. He concluded that there are many feedback loops within the rational decision making process. Decisions evolve from a complex pattern of feedback loops.

• Political model

This approach acknowledges that an organization made up of many different interests. For example, the stakeholders do not necessarily share the same goals of the organization.

• Garbage can model

This was first proposed by Cohen, March and Olsen in 1972. This approach views an organization as a collection of problems and solutions. Problems flow through organizations; solutions exist within organizations.

3.2 Decisions and Systems Thinking

A system is an inter-related set of elements. One executive has expressed the systems thinking this way, ‘When you trace back the stories, you will find out that all the changes came from hundreds of little things that individuals were doing differently’ (2). Effective systems thinkers do not act as individuals. We have to know that there are two types of systems, closed and open systems. We live in a very complex world and the organization should be a learning organization. Modelling is an important management activity. Modelling helps the decision makers to structure problems and enable them to reflect upon possible consequences of their decisions before taking action. Modelling can be quantitative or qualitative, but we should keep it simple and avoid mega models.  The Bounded rational model would solve the limited cognitive capabilities of individuals but there are other psychological considerations that need to be taken into account.  Each individual will have his or her own particular view and interpretation of reality. Therefore, different individuals will bring different perceptions to the organization.   

3.3 Strategic Decision Making

The strategy is the unifying theme that gives coherence and direction to the actions and decisions of an organization. When formatting a strategy the strategic decision maker has to make an assessment for the situation using subjective and imperfect information. There are three levels of strategy: corporate, business, and functional (3).  Peter Drucker argues that a company that thinks strategically is one which produces satisfied and loyal customers. Peter Drucker describes the sequence of steps involved in the decision making process (4):

1.      Classifying the problem

2.      Defining the problem

3.      Specifying the answer to the problem

4.      Deciding what is right, rather than what is acceptable, in order to meet the boundary conditions

5.      Building into the decision the action to carry it out

6.      Testing the validity and effectiveness of the decision against the actual course of events

The nature of the decision making process that result in strategies is explained by Henry Mintzberg. After a very helpful survey on this, he suggested that 10 schools of thought about the strategy process could be identified (2).

3.4 Prescriptive Schools (Mintzberg)

I shall attempt to give a brief about each school of thought:

1. The design school

Strategies are the result of conscious creative thinking based on conceptual modelling. In the design school, strategy is ‘grand strategy’. The CEO is the architect of the strategy and controls the strategy making process.

2. The planning school

Strategies are the result of the formal planning process led by the senior management team. Strategic decisions are an integral part of the planning process. Mintzberg’s critique this approach because it assumes that the future can be predicted, the strategic planning can be separated from operational management, and hard data analysis and techniques can produce novel strategies.

3. The positioning school

Strategies emerge from an analytical process that produces knowledge about the trends in the particular industry and than respond to those trends by establishing an appropriate strategy. Mintzberg’s critique is that this approach is too deterministic and the analytical frameworks constrain creative thought.

4. The entrepreneurial school

 Strategies are the products of visionary, strong entrepreneurial leaders. As a result, the process of strategy making is a mystery.

5. The cognitive school

Decisions are the outcomes of semi-conscious cognitive processes. They are not as conscious and deliberate as the rational prescriptive approach suggests. Mintzberg emphasised the need to understand better, how experience informs strategic thinking.

6. The learning school

When strategies are implemented, the decision maker learns what works well and what does not. Strategies are adapted in the light of learning. Learning is a process of finding out what works, understanding why it works, and than developing this new knowledge into action and behaviour. This is Mintzberg’s preferred approach.

7. The political school

Strategies emerge from the power-plays within an organization. The dominant strategy that emerges is that aligned with the preferences of the most powerful group within the organization.

8. The culture school

The culture school sees strategy emerging from a collective decision-making process in which all members of the organization share a common set of values and beliefs. In this case, organizational life is idyllic and free from power politics and strife.

9. The environmental school

Changes in the external environment determine strategic decisions. Strategy is a passive process that responds to changes in the external environment.

10. The configurational school

This is a collage of many of the other schools. Any particular strategy depends upon a number of factors.

Mintzberg contrives these schools of thought and they are analytical and artificial. Their purpose is to focus thinking upon the strategic making process. Mintzberg has found that there is a great discrepancy between what they actually do and what management theory says they should do (5).

4. The Examination of the Strategic Decision Making Process

4.1 Introduction

In this part from the assignment, I will critically examine the strategic decision-making process in Arab National Bank by taking some of their decisions as a sample for my examination. I am working for the one of the SBU’s in the bank, which is the Investment Services Group. Therefore, the levels of business and functional strategy will be the core for my examination.  I must explain that the decision making process is not open to every one in the organization. As a result, in some part of my examination I will adopt series of assumptions. Despite continuing concerns about the international economic environment, Investment Services has witnessed an exceptional growth in the last 3 years. We continue to offer a comprehensive range of investment products – primarily in Saudi and International share brokerage, investment funds and insurance. I will use some examples of decisions for my examination but firstly. I shall attempt to evaluate those decisions in order to link the theories, my analysis and the outcome of it to justify my answer to whether the decision making process in the group could be considered rational or not.

4.2 Evaluation

Programmed decisions involve situations that have occurred often enough to enable decision rules to be developed. Non-programmed decisions are made in response to situations that are unique (6).  The Group did recently face some problems; I am going to explain how they solved these problems in order to examine the decision-making process. In each of these problems, the Group did follow the logical steps of the rational model. I will explain these steps, the Group decision in each problem and the evaluation of the decision.  

One of the problems, which the Group did face recently, was the huge trend in the local market towards Islamic Investment Services. This trend has tremendously increased after September 11^th and the international war against terrorists. Many Saudis along with other Muslims got the feeling that this war was against them not against terrorists.  As a result, a huge amount of Saudi money held abroad returned to the local market. Their existing lines of services do not have such variety to satisfy this trend. Therefore,      they must solve this problem. By following the logical steps, they found that this problem is unique so it requires a non-programmed decision. They recognize the problem as an increase in demand for Islamic Investment Services, where its current services were limited. The Group’s strategic objective is to attack the market leader by offering the best financial services that satisfy the customer’s needs and to make continuous growth on the return of the capital employed by the shareholders. Developing some of the existing service to comply with the Islamic principle, adding a new range of Islamic services or not respond to the trend were the alternatives that the Group should choose from. After the evaluation of these alternatives concerning the Group’s objectives, they decided to add a new range of Islamic services. The Group did implement their decision and they are reviewing it regularly. If we want to evaluate this decision, by using Mintzberg schools of thought, I could say that the Group are following a Prescriptive school, which is the positioning school. This school is associated with Michael Porter’s 'generic' strategies; all the SBU’s in the bank are following 'generic' strategies, which is A Focus Strategy (7). This banking industry now is Oligopoly and soon will become in a Monopolistic Competition- so currently it is a stable industry in Saudi. Mintzberg’s criticism of this school is that the analytical framework constrains creative thought. Investment Services has witnessed an exceptional growth in the last 3 years. Therefore, we could say that this decision was truly an effective decision. If we look to the outcome of the decision, we would say that yes, there is an exceptional growth with Group business in the last 3 years but there is also a decrease in the Group market share. They just focused on solving the problem and they did not take in consideration their current resources. They should know that “Customer relationships are the key to the marketing strategy” (8). I think if the Group did an assessment of the internal environment, they would not take this decision. The effectiveness of this decision depends upon the quality and quantity of the available resources. In recent years, the necessary internal resources that enable the organization to achieve its strategic objective has become known as the ‘resource-based approach’ to strategy. Therefore, I could say that the Group decision was not an effective decision. The market is growing but our market share is decreasing so we should ask ourselves is this what the Group was looking for?                 

Anther problem is that the local equity brokerage business is increasing rapidly over the last few years and the Group is facing a lack of licensed brokers. The huge amount of Saudi money held abroad returned to the local market after September 11^th was the main reason for this increase in the local equity market. Besides that, the Saudi government started its privatization plan in many sectors, which made the local equity market more attractive than before. The local equity market index achieved 14% in 2002, 51% in 2003, 94% in 2004, and 49% up to date in 2005. The number of customers increased more than 10 times during this period and the demand for the local equity brokerage is still increasing. The contribution of the local equity brokerage business to the bank’s profit is more than 20% and still increasing. Therefore, the threat is huge from the lack of licensed brokers. If we want to define the problem, we find that the licensed brokers are leaving the bank in order to get a higher wages from other banks. Therefore, the problem is the Group should decide how to maintain the existing brokers and how to attract licensed brokers from other banks.  This problem is a programmed one and the Group’s objectives are clear. Because of the power-plays within the organization, they decided to recruit licensed brokers from the other banks to increase the number of licensed brokers and to avoid losing their customers. This decision did not solve the problem but increased it because the existing brokers found themselves being paid less than the new ones. If we start to evaluate this decision by using Mintzberg’s work, I would say that this decision was the result of the political school of thought. This decision did solve a part of the problem, which is the lack of the licensed brokers. The most important part, which is why we were losing our licensed brokers to the other banks, the Group did not solve. This part was requiring the joint efforts from the Group and their Human Resources management, in order to review the salary structure and rewarding system of the brokers to maintain the existing brokers and to attract new brokers. An on job-training program for fresh graduates was developed so they can be eligible to get the brokerage licenses from the Central Bank. The local equity brokerage business in tremendously increasing and most of the experts believe that this growth will continue for the next decade and the Group should be ready to meet that challenge if they want to achieve their strategic objectives. 

The last problem in my evaluation is that the Group along with rest of the bank are facing a huge pressure from the Saudi government toward all the banks to increase the number of Saudi staff and decrease the number of expatriates within the banks. This pressure was the result of the increase in the unemployment percentage of the Saudi citizens. The problem is how to increase the numbers of Saudi staff without affecting the Group’s objective. The problem is unique and it requires a non-programmed decision. From many alternatives, the Group decided to attract fresh graduated Saudis from local and international universities and offer them positions within the Group and the chance to sponsor them for higher education. The implementation of this decision was successful and the result was great. During the last 5 years, the Saudis staff ratio increased from 60% in 2000 to 86% in 2005. If I want to evaluate this decision, I would say that this decision is representing Mintzberg’s learning school, which is Mintzberg’s preferred approach. This decision is an effective decision that could be justified from the successful outcome.                     

4.3 Rational or Irrational

To search for the optimal strategy, there is one best way, assumption, predictability and clear objectives are some of the features of the Rationalist School. As a joint-stock company, the stockholders have competing views about what is the most appropriate means of achieving the organization’s objectives efficiently and effectively. Therefore, how we could say that all the Group decisions are rational? The question for this assignment was whether or not and to what extent the organization strategic decision-making process can be considered rational. Most of the researches that had been conducted in the Western world and still more researches need to be done on other societies. What is rational in a Western mind could be irrational in our culture. Since values arise from basic psychological characteristics of men, it is not the existence or non-existence or values that distinguishes a man from his neighbour. Further, the variety of experience that makes contemporary life makes conflict in values an inescapable adjunct to living (9). The Arabic culture, specially the Islamic culture, is different in a sense of what could be accepted in our culture is not necessarily accepted in the Western world. The government, the religion, the relationships, and the regulations are the major factors that have a great influence in the decision-making process within my organization as well as in the rest of the societies.

The first problem in my evaluation is a good example of the influence of the religion on the decision. That decision was a result of the logical steps provided by the rational model but the outcome from this decision cannot justify the rationality of the decision.  The rationality is searching for the best decision but I did justify that it can be better. Furthermore, is there a truly Islamic investment service or not. Many Western experts believe that the only genuinely Islamic banking is practised by the venture capitalists in London and New York. This is the rational Western thinking about Islamic banking but we do have truly Islamic Investment services. The Islamic religion does offer many alternatives for the investment services. The investor could buy any equity if the liability of the specified organization is not more than 30% of its capital and the investor could sell any material to a buyer on an instalment basis with a profit margin but not as an interest. Therefore, the rationality in our culture could be irrational in the Western mind, where interest is the dominant element.

The second problem is another example of the factors that have a great influence on the decision making process from the power-plays within the Group. The decision was not rational and the Group did not have a choice because of that, they have been forced to take this decision.

 The last problem is a pure example for the rational decision-making process. The evaluation for this decision is justifying the rationality of the decision and its process. There were no factors to influence this decision.

I would say that the Group is following the logical steps of the rational model in all of their decisions but I cannot say that all of their decisions are rational. We must take into consideration the limitations of the rational models. Many factors in our culture have great influence in the decision-making process; many decisions were supposed to be rational but with the influence became irrational. I did justify that if there were no influences, the Group are trying to make its decision rational.

                

5. Conclusion

By using the textbook and other references, I was able to understand the decision-making process. I have demonstrated my understanding of the theories by applying it to my organization. I have given brief general information about the bank. I did a brief review on the models of decision-making, decision and system thinking, the strategic decision-making, the relation between the psychology and decision-making and prescriptive schools. I critically examined the strategic decision-making process within the Investment Services Group by taking some examples of decisions. I did discuss the major factors that have a great influence in the decision-making process in the Group. I explained what can be rational in a Western mind is not essentially rational in our culture and I justified by using the example of the Islamic investment services. I proved that the Islamic banking does exist. I linked the question, the theories, the analysis, and the outcome of it to decide if the decision-making process in the Group can be considered rational. I did justify that if there were no influences, the Group is trying to make its decisions rational.

6. Limitation of The Sample  

This assignment is based on a specific part within the bank where I am working, which is the Investment Services Group. Therefore, my conclusion could possibly be faulty because of the limitation of the sample. We should also keep in mind that what is rational in a Western mind could be irrational in our culture. I did take an example in my assignment trying to prove that there are major differences between our culture and the Western culture with regard to what is rational, and what is not. My conclusion cannot generalize on the whole bank; more research would be needed especially in our society’s ethics and cultural background.  

       

7. References:

1. (www.brs-inc.com).

2. Management Centre, Module 2 MBA, Strategic Analysis and Choice, University of Leicester.

3. Thompson & Strickland, Crafting and Executing Strategy, 12^th Ed, Chapter 2.

4. Peter Drucker (1967), The Effective Decision, Harvard Business Review on Decision Making.

5. Mintzberg, Henry, The Manager’s Job: Folklore and Fact, Harvard Business Review, March-April 1990.

6. Richard Daft, Management, 6^th Ed., Chapter 9 p.273.
7. Philip Kotler, Marketing Management, 11^th Ed, Chapter 4.

8. (http://marketing.about.com/library/weekly/aa070203a.htm).

9. Chris Argyris, Interpersonal Barriers to Decision Making, Harvard Business Review on Decision Making.