1.3 Strategic Decision-Making Framework

Strategic decision-making is crucial for businesses to thrive. This section dives into key frameworks like SWOT analysis and Porter's Five Forces, which help companies assess their position and competitive landscape. These tools provide a structured approach to understanding internal and external factors affecting business success.

Cost analysis techniques are also vital for strategic decisions. We'll explore methods like cost-benefit analysis and relevant cost analysis, which help managers evaluate options and make informed choices. Understanding concepts like sunk costs and opportunity costs is essential for avoiding common pitfalls in decision-making.

Strategic Analysis Frameworks

SWOT and Porter's Five Forces

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• SWOT analysis evaluates internal strengths and weaknesses alongside external opportunities and threats
  • Strengths: Unique resources, strong brand reputation, innovative technology
  • Weaknesses: Limited financial resources, outdated production methods, high employee turnover
  • Opportunities: Emerging markets, new customer segments, technological advancements
  • Threats: Increasing competition, changing consumer preferences, economic downturns
• Porter's Five Forces assesses competitive intensity and market attractiveness
  • Threat of new entrants examines barriers to entry (economies of scale, capital requirements)
  • Bargaining power of suppliers influences input costs and resource availability
  • Bargaining power of buyers affects pricing strategies and customer retention
  • Threat of substitute products impacts market share and customer loyalty
  • Rivalry among existing competitors drives innovation and pricing pressures

BCG Matrix and Scenario Planning

• BCG matrix categorizes products or business units based on market growth and relative market share
  • Stars: High growth, high market share (smartphones, electric vehicles)
  • Cash Cows: Low growth, high market share (established consumer goods)
  • Question Marks: High growth, low market share (emerging technologies)
  • Dogs: Low growth, low market share (outdated products)
• Scenario planning prepares organizations for multiple future outcomes
  • Identifies key drivers of change (technological advancements, regulatory shifts)
  • Develops plausible future scenarios (optimistic, pessimistic, most likely)
  • Assesses potential impacts on business strategy and operations
  • Creates contingency plans for each scenario to enhance organizational resilience

Cost Analysis Techniques

Cost-Benefit and Relevant Cost Analysis

• Cost-benefit analysis compares total anticipated benefits to total expected costs
  • Quantifies both tangible and intangible factors in monetary terms
  • Calculates net present value (NPV) to account for time value of money
  • Uses benefit-cost ratio to determine project viability (ratio > 1 indicates positive return)
• Relevant costs focus on future costs that differ between alternatives
  • Includes only costs that will change based on the decision at hand
  • Excludes past costs and costs that remain constant across alternatives
  • Helps in making informed decisions by isolating decision-relevant information

Sunk and Opportunity Costs

• Sunk costs represent past expenditures that cannot be recovered
  • Should not influence future decision-making (research and development expenses)
  • Often lead to irrational decision-making due to psychological attachment
  • Recognizing sunk costs helps avoid the sunk cost fallacy in strategic decisions
• Opportunity costs measure the value of the next best alternative forgone
  • Represent the implicit cost of choosing one option over another
  • Often overlooked in decision-making but crucial for accurate cost assessment
  • Calculated by identifying the potential benefits of alternative choices (investing in stocks vs. bonds)