Strategic Investment Decision Appraisal Techniques: The Old and the New - Document (2024)

Date: Nov. 2000

From: Business Horizons(Vol. 43, Issue 6)

Publisher: Elsevier Advanced Technology Publications

Document Type: Article

Length: 5,427 words

It's time to pay closer attention to one of senior management's most important challenges.

Strategic investment decision making involves the process of identifying, evaluating, and selecting among projects that are likely to have a big impact on a company's competitive advantage. More specifically, the decision will influence what the company does (the set of product and service attributes that define its offerings), where it does it (the structural characteristics that determine the scope and geographical dispersion of its operations), and how it does it (the set of operating processes and work practices it uses).

There is a critical need to get a strategic investment decision, or SID, right. On one hand, if it proves successful, the company reaps major strategic and operational advantages. On the other hand, if it is a mistake, either an important opportunity is lost forever or the company has needlessly squandered substantial resources.

Investment decision making has all the elements of a classic cost-benefit analysis. Accordingly, one might expect the process to be supported by a large and thorough body of literature. Surprisingly, this is not the case. As Shank (1996) points out, the four steps involved in making strategic investments--identifying spending proposals, quantitative analysis of the incremental cash flows, assessing qualitative issues that cannot be fitted into the cash flow analysis, and making a "yes" or "no" decision--are poorly covered in textbooks and receive only marginally better coverage in the journals:

Step one receives virtually no attention in the formal literature--proposals just appear, somehow. Step two gets nearly all the attention. Step three is a stepchild, always made to feel guilty because it can't fit into step two. Step four is assumed to flow logically out of step two. There is due consideration for the "soft" issues in step three, but decisions, as described in textbooks, derive largely from the quantitative analysis.

Perhaps the poor coverage devoted to the process is part of the reason why managers are frequently accused of making investment decisions that lack strategic sequence or cohesion. Hayes and Abernathy (1980) and Hayes and Garvin (1982) long ago pointed to and chastised companies for increasingly relying on quantitative analytical techniques that provide maximal attention to cash flows and minimal recognition to the strategic implications such decisions can produce. As Hayes and Garvin so aptly phrased it, "Investment decisions that discount the future may result in high present values but bleak tomorrows."

Even today, criticisms about managers' strategic investment practices continue to be voiced. Anglo-American managers are often the target of this criticism. Carr and Tomkins (1996) recount how one German chief executive described American managers as mere financial engineers, who had lost any feel or intuition for the products they sell and the markets they serve. Carr and Tomkins also describe how a Japanese senior manager criticized Anglo-American managers for failing to integrate technology appraisal with strategic formulation and control. According to the Japanese manager, "Technology is too important to be excluded from corporate strategy."

WHAT'S WRONG WITH TRADITIONAL APPROACHES?

Traditional approaches...

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