Friday, November 26, 2010


Investment Decisions and Corporate Strategy

Recently, a lot of emphasis has been placed on the view that a business firm facing a complex and changing environment will benefit immensely in terms of improved quality of decision making if capital budgeting decisions are taken in the context of its overall corporate strategy. This approach provides the decision maker with a central theme or a big picture to keep in mind at all times as a guideline for effectively allocating corporate financial resources. As argued by a chief financial officer.

Allocating resources to investments without a sound concept of divisional and corporate strategy is a lot like throwing darts in a dark room.

Similarly, an American businessman argues as follows.

“We have erred long by exaggerating the improvement in decision making that might result from the adoption of discounted cash flow (DCF) or other refined evaluation techniques. What is need are approximate answer to the precise problems rather than precise answer to the approximate problems. There is little value in refining an analysis that does not consider the must appropriate alternative and does not utilize sound assumptions. Management should spend its time improving the quality of assumptions and assuring that the all strategic questions. Have been asked, rather than implementing and using more refine evaluation techniques
In fact a close linkage between capital expenditures, at least major ones, and strategic positioning exists which has led some researchers to conclude that the set of problems companies refers as capital budgeting is a task for general management rather than financial analyst. Some recent empirical works amply support the practitioners concern for strategic considerations in capital expenditure planning and control. It is therefore a myopic point of view to ignore strategic dimensions or to assume that they are separable from the problem of efficient resource allocation addressed by capital budgeting theory.

Must companies in Asia consider strategy as an important factor in investment evaluation? What are the specific experiences of the companies in Asia in this required? Examples of six companies showing how they defined their corporate strategy are given as follows:
  • To remain market leader by highest quality and remunerative prices. This company undertook the production of a new range of product (which was marginally profitable) for competitive reasons.
  • To have moderate growth for saving taxes and to set up plants for forward and backward integration.
  • Our strategy is to grow, diversify and expand in related fields of technology only. Any project which is within strategy and satisfied profitability yardsticks is accepted. This company found a low profit chemical production proposal acceptable since it came within its technological capabilities.
  • Strategic involves analysis of the company’s present position, nature of its relationship with the environmental forces; company’s business philosophy and evaluation of company’s strong and weak points.
  • To take up new projects for expansion in the fields, which are closer to present projects or technology? This company rejected a profitable project while it accepted a marginally profitable project since it was very close to its current heat transfer technology.
  • To stay in industrial intermediate and capital goods line and in the process to achieve three fold profits in real terms over five years. This company rejected a highly profitable project since it was a consumer durable and accepted a marginal project.

One more example is that of an Indian subsidiary of a giant multinational that looks for projects in high technology, priority sector. This company even sold one of its profitable non-priority sector division to a sister concern to maintain its high-tech priority sector profile.


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