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Management of a business organisation makes various decisions in the course of their business operational obligation and duties in which most of them relate to financial efficient finance management and investment decision. Among all of the decision of the management a investment decisions are most challenging. Strategic investment decisions affect the future direction and objective achievement of the organisation in a fundamental way. Indeed future success of an on organisation depends upon the strategic investment decisions that the organisation makes today. Strategic investment decisions defined as: decisions concerning long-term investments in assets for example purchase of new properties or buildings, technology or equipment, business project, or technical services and knowledge acquisition in order to achieve the organisation strategic objectives. Strategic investment decisions have increasingly involved competent usage of more sophisticated resources and effacement capital management.
Correct handling of a firm resource is essential for the firm survival. To allocate resources in a profitable way companies usually have formalized procedures for calculations of the profitability of investment projects. Another important aspect of resource allocation is the corporate strategy. The strategy gives direction for the company activities and thus ultimately states how the company resources should be used.
Strategic investment decision making involves the process of identifying, evaluating, and selecting among planned projects or new emerging business oportunities that has a significant impact on the organisations aimed future objective and goals. Specifically the decision influence what the organisation does where it does it and how it does it. Means that what the organisation set of product, service and activites characteristics that defines its current businenss operation on depending upon the strenght of organisation resources, capital and access to the business markets and how the organisation set of business operating processes and activites are to be planned by tahking in view the organisation resources and objectives.
The strategic investment decision making process is one of greatest challenges for the management of the organisation. There is a critical need to get these decisions right. For on the one side if the decision proves successful the orgainsation reaps major strategic and operational advantages. On the other side if the decision be wrong, either an important opportunity is forever lost or it has needlessly waste of substantial resources by virtue of making a fruitless investment.
The strategic investment decision is a level of managerial activity that provide goal setting and overall direction of the organisation. It is a process that evaluates and controls the all of business activities of the organisation because it sets the goals and objectives to meet in the future by utilizing the key resources of the organisation.
1.1 Problem Statement 3
Usually management is expected to be involved in planning, control and decision making. Management is required to anticipate future events well in advance and to consider the options available to them in preparing the organisation to face the future events as they occur. The management role is to apply experience and knowledge of the industry, weigh up the risk involved and make the decision.
Strategic investment decision focused on the economics of capital budgeting, the agency relationship between directors and shareholders, and to meet uncertainty. The nature of managerial involvement in strategic investment decisions is an area play a very vital role in management of an organisation. This was the basis of the interest that led to the conduct of this research thesis. Since managerial activities take place within the organisation and managerial involvement should not be investigated in isolation. Thus the aim of the study and research questions discussed below.
The strategic investment decision involvement includes proactive communications with other managers, tackle uncertainty and ambiguity, modifying business ideas, exercising managerial decision and the manner in which senior and junior management relate during decision making process. The nature of managerial involvement as used in this thesis refers to nature of managerial activities with respect to the formation of strategic investment decision and existing systems and usual order of events during that happen during strategic investment decision process. The research aim of this study is therefore to investigate the management involvement individually and collectively and the nature of activities carried out during strategic investment decision making. This thesis will investigate whether the companies acknowledge the problem of arrange in a line corporate strategy with the investment process and what methods are used to ensure alignment. These methods will be evaluated from a theoretical point of view by using academic literature and theories as a base for this evaluation. This thesis will also contribute to an identification of strategy related questions which need further attention in the investment process. With this knowledge companies can improve their investment processes and gain long term competitive advantage.
This research study concentrates on the capital intensive industry as the importance of aligning investments with corporate. The investment decisions made ties up large sum of money and affect profitability for a long time. Capital projects represent long term investments in assets for which the expected economic benefits extend beyond the current year and which life extends beyond the current period. Bad projects will have negative economic consequences for the firm. The time aspect of the capital investment decision makes it vital that these decisions are aligned with company strategy as the company strategy should be concerned with the long term allocation of company resources.
In order to achieve the aim of this study, it has been translated into the following research questions:
What The significance of SID for business and financial objectives and its impacts on stakeholders?
Elicit the Strategic investment decision compotation on business & financial objectives and its recompilations and short coming for stakeholders?
What stages does the SID process go through?
Are the stages of the SID process, similar across organisation? If not, how do they differ?
Who gets involved in SID making, its impact on business & stakeholders?
When do managers get involved in the SID process and in which activities?
What to do the management during SID making?
How do managers get involved in SID making?
How does management behave in SID making and keep intact the interest of business and financial objectives and the major stakeholders?
What influences the nature of involvement of the managers in SID making?
The strategic investment decision strategy formulation begins with a vision. What the company wishes to become in the distant future. Then the company's mission is formulated, which includes its purpose, philosophy and goals. The company goals may be either measurable (sales, market share, return on investment, earnings per share, profit growth, sales growth etc) or more difficult to measure. Then a company profile that reflects its capabilities and assesses its strengths and weaknesses is developed. Then the company's external environment including competition as well as other factors is assessed. Then the company's resources are matched with its external environment in order to identify opportunities for the company, of which the most desirable options are selected. Long-term objectives and grand strategies to achieve these are developed, and are then translated into short-term strategies and action plans. After the plans and programs have been developed, the strategic investment making process begins.
1.3 Research objectives
The outcome of this thesis will be a framework for investment project evaluation that is derived from academic literature and empirical studies. The framework is constructed by.
Discussing relevant concepts and managerial approaches to strategic investment consideration.
Discussing what investment project related benefits is with focus on and finding a solution for their classification and measurement in firm strategic management context.
Developing a strategic investment project evaluation framework based on stakeholder perspective and previously formulated intangible benefit classification and measurement elements.
1.2 Rationale and Scope of the Study 5
Decisions tend to open certain paths into the future while closing others. An organisation capacity to increase in highly competitive business environment and markets is greatly dependent on its ability to refresh itself through investments that match the organisation business strategy and capability of strategic investments. Strategic decision making is a key process that is of the utmost importance to any business organization irrespective of size. This research thesis have looked at the subject of investment from a range of perspectives as discussed below though the nature of managerial involvement during the Strategic investment making process.
This research tended to concentrate on the investment evaluation aspect of SID making with the result that other aspects for example human being involvement and behavioral aspects have been investigated. Ever since strategic investment decesion involves risk and uncertainty and management often have to rely on subjective judgments and it has observed that subjective judgments are often not part of prescribed decision making processes. Decisions usually involve relationship of influence among participants. The arrangements of influence however are a function of individual interests and organisational power involved in the strategic investment making process. The level of influence is thus related to the individuals who are involved in the process and observe decision making in organisation rational and instinctive judgments.
There is usually an abundance of data produced at the s investment appraisal stage of strategic investment decision however managers must make logic of the data and make a decision. The focus of thesis is particularly on the nature of involvement of the various managers in strategic investment decision. The overall aim was to gain an insight approaching into the level of involvement of the participants and explore factors that may affect this level of involvement. The SID making process goes through identifiable stages thus some functions are more suitable to be performed at certain stage than others. The study also attempted to identify factors that might enhance or enable managerial judgment and involvement in strategic investment decisions.
Scope strategic investment decision making has various aspects that can be researched. However this thesis only examined the nature of managerial judgment and involvement in the situation within which the strategic investment decision making took place.
1.3 Theoretical Consideration 6
"Theory without practice is insufficient; practice unguided by theory is aimless." (Gutek, 1988: 1)
Formal theory to explain the nature of involvement of management in strategic investment decision making is very vital on strategic investment decision making. Instead various theories have been applied to explain and meet the needs of SID making process and to provide a framework for understanding and researching SID. Therefore this thesis presents a summation of theories relevant to SID making.
Constructs, concepts and models of strategic decision making and their interactions are used to provide explanations of strategic decision making phenomena and the fundamental forces behind this decision making process. These concepts and models are drawn from a variety of disciplines relevant to strategic investments decision. Strategic investment decision is however made under conditions of risk and uncertainty
Fig. 1.1 The interdisciplinary nature of SID making
Fig. 1.2 - Â§ Interaction among the behavioural sciences disciplines
1.5 Significance of the Study 22
Multiple managers with various professional backgrounds and functional positions get involved in the strategic investment decision making. The nature of managerial involvement in this thesis study focuses on the organisational background and psychological factors that may enhance managerial judgment and involvement in the SID process. Organisational background identifies the various stages of project selection and management participates at these stages in efficient manners. Although other characteristic may debatably be important also the study concentrates on the psychological make of framing and group harmony that managers may display when involved in strategic investment decision making. The application of framing and group harmony enhance of managerial judgment and involvement in SID making which help to appreciate the importance of the nature of managerial involvement in SID making.
In this study investigate whether companies acknowledge the problem of aligning corporate strategy with the strategic investment decision process and what methods are used to ensure association. These methods will be evaluated from a theoretical point of view by using theories as a base for this evaluation. This thesis will also contribute to an identification of strategy related questions which need further attention in the strategic investment decision process.
There are usually three levels of decision making hierarchy in a firm and these are Corporate, business and functional level. At the corporate level the long term plans are developed. At the business level the managers translate the directions from the corporate level into concrete objectives and strategies. At the functional level annual objectives and short term strategies are developed that are concerning such areas as production and business operations. The implementation of strategy takes place at the operations level where the directions from the corporate level are executed. The implementation of strategy should be done according to doing things right rather than doing the right things.
"Doing things right" means addressing issues like production efficiency and effectiveness, quality of customer service, success of particular products. The decisions at this level involve action oriented operational issues of short range incurring modest costs and are adaptable to ongoing activities that are relatively concrete and quantifiable.
Thus the implementers could easily be everyone in the organization. Presidents and directors functional areas, divisions or strategic business units will put together large scale achievement plans. Then managers of plant scheme and the whole unit of the management will put together plans for their specific department and units. Hence every operational manager and every employee will be involved in some way in implementing strategies of strategic investment decision in order to acquire business and financial objectives of the organization.
VNB(Diagram page as on page no 27 will make later on )
Strategy means the direction and scope of an organisation over the long term which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations".
"Successful companies know how to adapt to a continuously changing marketplace through market-oriented strategic planning, the managerial process of developing and maintaining a viable fit between the organization's objectives, skills, and resources and its changing market opportunities. The aim of strategic planning is to shape the company's businesses, products, services, and messages so they achieve targeted profit and growth" (Kotler 2003, p. 58).
Strategy at Different Levels of a Business
Strategy is an integral part of decision making in a business opertation. Strategies exists at several levels in any organisation ranging from the overall business and group of businesses through to individuals working in it. Follwing are the type of strategies.
Corporate Strategy:- Corporate strategy is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision making throughout the business. Corporate strategy is often stated explicitly in a mission statement of an organisition.
Business Unit Strategy:- Business strategy is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.
Operational Strategy:- Operational Strategy is concerned with how each part of the business is organised to deliver the corporate and business unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc.
Strategic management is the conduct of drafting, implementing and evaluating cross functional decisions that will enable an organization to achieve its long term objectives and goals. It is the process of specifying the organization mission, vision and objectives and developing policies and plans in terms of projects and programs which are designed to achieve these objectives and then allocating resources to implement the policies and plans according to the projects and programs in order to achieve organisatioal business and financial objectives. A balanced scorecard is often used to evaluate the overall performance of the business and its progress towards objectives.
Strategic management is a level of managerial activity under setting goals and over policy. Strategic management provides overall direction to the enterprise and is closely related to the field of Organization Studies. In the field of business administration strategic alignment between the organization and its environment and strategic consistency is very useful. the strategic consistency exist when the actions of an organization are consistent with the expectations of management and these in turn are with the market and the perspective of the organisation.
Strategic management is an ongoing process that evaluates and controls the business and the industries in which the company is involved in order to assesses its competitors and sets goals and strategies to meet all existing and potential competitors. And then reassesses each strategy annually or regularly to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment.
3.1.1. History of strategy
At the beginning efforts in corporate strategy were generally limited to the development of a budget for a under line project with managers realizing that there is a need to plan the allocation of funds.
Later in the first half of the 1900s business managers expanded the budgeting process into the future. Budgeting and strategic changes were compined into the extended budgeting process so that the budget supported by the strategic objectives of the firm in order to achieve overall business goals and mission of organisarion. The competitive environment at this time was fairly stable and conventional so it also demand to adopt a formulated strategy to stay alive in business.
"The need for a concept of strategy related to business became greater after World War II, as business moved from a relatively stable environment into a more rapidly changing and competitive environment." (Underwood 2002) At this time broad scope and large scale management processes become dramatically more sophisticated. Because as the size and number of firms increased in all types of business eviroment therefore due to increasing competition the business started getting involved in international trade and now it is very vital for a business to follow the myths of strategic managemet
"The accelerated rate of change put a premium on the ability to anticipate change, to take advantage of new opportunities, and to take timely action in avoiding threats to the firm" (Bracker, 1980). Now business managers realized that external events were playing an increasingly important role in determining corporate performance. As a result they began to look externally factors for significant drivers such as economic, political and enviromental forces.
A significant improvement in management processes came when many ideas were blended and increased emphasis was placed on environmental forecasting and external factors considerations in formulating and implementing plans. This all encompassing approach is known as strategic management or strategic planning.
"The basis of contemporary strategy is Competitive advantage that a firm needs to identify its core competencies and then convert that identification into a mission the purpose of the mission statement is to keep the firm focused on its unique area of competitive advantage". [Underwood 2002]
3.1.2. Strategy formulation, implementation and evaluation
Strategic management techniques can be viewed as bottom up, top down, or mutual processes. In the bottom up approach the employees submit proposals to their managers who in turn channelize the best ideas further up the organization. This is often accomplished by a capital budgeting process. Proposals are assessed using financial criteria such as return on investment or cost benefit analysis. Cost underestimation and benefit overestimation are major sources of error. The proposals that are approved form the substance of a new strategy all of which is done without a grand strategic design or a strategic architect. The top down approach is the most common by far. In it the top management with the assistance of a strategic planning team decides on the overall direction the company should take. Some organizations are starting to experiment with collaborative strategic planning techniques that recognize the emergent nature of strategic decisions.
Strategic decisions should focus on Outcome Time remaining and current Value priority. The outcome comprises both the desired ending goal and the plan designed to reach that goal. Managing strategically requires paying attention to the time remaining to reach a particular level or goal and adjusting the pace and options accordingly. Value priority relates to the shifting relative concept of value addation. Strategic decisions should be based on the understanding that the value addation of whatever you are managing is a constantly changing fundmental objectives of the organization. An objective that begins with a high level of value addation may change due to influence of internal and external factors. Strategic management is managing with a heads up approach to outcome time and relative value and actively making course corrections as needed in order to achive business and financial objectives of the organisarion. Satrategic management adoption process involve the follwing key eliments.
Strategic formulation is a combination of three main processes which are as follows.
Performing a situation analysis that is self evaluation and competitor analysis either internal or external and both micro environmental and macro environmental.
Simultaneous with this assessment of the objectives that are set. These objectives should be parallel to a time line means some are in the short term and others on the long term. This involves crafting vision statements based on long term view of a possible future and mission statements is the role that the organization gives itself in society. To attain overall corporate objectives both financial and strategic.
These objectives should be in the light of the situation analysis that suggest a strategic plan. The plan provides the details of how to achieve these objectives.
The corporate strategy formulation begins with a vision what the company wishes to become in the distant future . Then the company's mission is formulated which includes its purpose, philosophy and goals. The company goals may be either measurable in term of sales, market share, return on investment, earnings per share, profit growth, sales growth or more difficult to measure economically responsible. Then the company profile that reflects its capabilities and assesses its strengths and weaknesses is developed. Third, the company's external environment (including competition as well as
other factors) is assessed. Then the company's resources are matched with its external
environment in order to identify opportunities for the company, of which the most
desirable options are selected. Long-term objectives and grand strategies to achieve
these are developed, and are then translated into short-term strategies and action
plans. After the plans and programs have been developed, the budget process begins.
The budget planning is the last feasibility check management has on the selected
strategy [Hunger, 1996 p. 224]. The strategic choices are implemented by means of
budgeted resource allocations. Finally, the success of the strategic process is
evaluated as an input for decision making in the future. [Pearce, 1997, p.3, where not
Measuring the effectiveness of the organizational strategyis extremely important to conduct a SWOT analysis to figure out the strengths, weaknesses, opportunities and threats both internal and external of the entity. This may require to take certain precautionary measures or even to change the entire strategy.
In corporate strategy model in which strategic options are evaluated against three key success criteria
Suitability:- Suitability deals with the overall rationale of the strategy. The key point to consider is whether the strategy would address the key strategic issues emphasize by the organisation strategic position.
Feasibility:- Feasibility is concerned with whether the resources required to implement the strategy are available or need to be developed or obtained. Resources include funding, people, time and information.
Acceptability:- Acceptability is concerned with the expectations of the identified stakeholders mainly shareholders, employees and customers with the expected performance outcomes which can be return in the form of risk and stakeholder reactions.
Return: deals with the benefits expected by the stakeholders financial and non-financial. For example shareholders would expect the increase of their wealth, employees would expect improvement in their careers and customers would expect better value for money.
Risk: deals with the probability and consequences of failure of a strategy either financial or non-financial.
Stakeholder: reactions deals with anticipating the likely reaction of stakeholders. Shareholders could oppose the issuing of new shares, employees and unions could oppose outsourcing for fear of losing their jobs, customers could have concerns over a merger with regards to quality and support.
The Role of Strategy 32
Strategy plays a significant role in investment decision making. The most investments follow from the organization strategies for example a company strategy may be to achieve high growth within its industry. The organisation strategies reflect both the special skill and abilities that the company possesses that is its comparative advantage over others.
Strategy may be looked at as a logical response to environmental change or it is the basic characteristic of the match an organisation achieves with its environment. This indicates that there is a close relationship between strategy and decision making. Strategic aspects of decision making refer to what has not been encountered before in quite the same form and are vital in terms of resource obligation laid down.
Strategy molds investment decisions in that the attractiveness of the investment proposal depends equally on its strategic importance as on the rate of return it offers. It is a strong link between capital investment and strategic planning and decision making
The strategy has looked at the normative theory of strategy and only highlights the role of strategy in investment decisions. It is focused on how manager knowledge of strategy formulation impacts on their judgment and involvement in strategic investment decision. This study looks at manager's involvement in SID and the stages of the SID process in various organisations which stage formulation of strategy features impact on managerial judgment and involvement in SID.
Strategic analysis techniques include strengths, weaknesses, opportunities and threats it is called SWOT analysis. Strategic portfolio techniques are very helpful in decision making. The management strategic planning of investment decisions involves more than financial considerations since financial considerations are not the same for every investment but they consider strategic options as well. Indeed where the investment is considered strategically very important it would justify over riding financial evaluations completely. The management advocate having strategic planning and finance departments together which indicates that those involved in the finance function are expected to have knowledge of strategic planning as well. SID making is part of strategic decision making function of an organisation as it is clearly linked to the long term strategic direction of an organisation. One of the considerations at the preliminary screening of strategic investment decision proposals is whether it is in line with the organisation overall strategy. The use of strategic analysis techniques when planning investment decisions screening of projects involves screening for strategic fit. However it did not focus on how managers involved in SID and participate in strategy formulation and how knowledge of strategy formulation impact on their judgment and involvement in SID.
Strategy is different from planning and the difference is particularly marked in the complex, unique and rapidly changing environment in which the business organisation operate in. Although strategic management involves decision making it is not simply about decision making. Companies usually construct projects or investments into strategies and use evaluation of the projects as a starting point for monitoring the implementation progress. To assist strategic monitoring quantitative skills such as those possessed by the management accountant are very important and this study focuses on involvement of senior and general managers with management accounting training in order to efficient making of strategic investment decision.
Strategic planning and investment decisions are linked and the features of strategic decisions are highly relevant to achieve business and financial objectives. Normally a business will start by formulating a strategic plan that guides its search for projects to invest in. Accordingly strategic planning and project analysis are harmonized and strengthen each other. Strategic planning deals with the big picture while project analysis looks at the individual elements within the big picture. Project analysis can be used to verify whether or not the strategic plan is correct. It might provide useful feedback that can be used to verify the accuracy of the plan. If attractive projects are not found within the plan than there is need to revise both the strategic plan and the project analysis. The organisation can therefore prepare a strategic investment strategy which is to utilize in looking for and assessing investment opportunities. This strategy will lead to a strategic plan that the company uses in searching for projects usually by recognizing product lines and geographical areas in which to look for promising investment projects. This study recognizes the interaction between the strategic plan and investment decisions and sets out to find the importance of strategy formulation during the strategic investment decision process.
4.4.1. Definition of investments
4.4.2. The investment budget
4.4.3. Investment manual
4.4.4. The investment request (IRE)
4.4.5. Local and formal approval cycle
4.4.6. The IRE process
4.4.7. Evaluation parameters
4.4.9. In line with strategies
4.4.10. Prioritization .
4.4.11. Seeing the whole picture
4.5. The strategic process
4.5.1. Vision, mission, drivers and values
4.5.2. Strategy from a "business development" point of view
4.5.3. Divisional level and top-down investments
4.5.4. Strategy in the investment process
4.6. "In the middle", interview with Erik Nelander
2.1 Investment Appraisal and Capital Budgeting 31
3.2. Capital investments
3.2.1. The investment process
3.2.2. History of the investment process
3.3. Strategy aspects in the investment process
2.1.2 Strategic investments
2.1.3 Investment project costs and benefits
2.1.4 Intangible aspect to investment project benefits
3.3.1. The capital budget must reflect strategy
3.3.2. Informal communication and pre-determined evaluation processes
3.6.1. Communicating strategy
3.6.2. Cultural aspects.
3.6.3. Using the right base case
3.6.4. Taking a corporate perspective
3.6.5. Seeing the whole picture
3.6.6. Unbundling of subprojects
3.6.7. Controllers as strategic partners
3.6.8. The time aspect
SID Making and Risk 35
Capital Budgeting Process 36
Effect of Decision Makers 38
Role of Management Accountants (MAs) 40
2.2 Behavioral Aspects of SID Making 43
Psychological-based Perspectives 44
Organisational Politics 47
Sociological Perspectives 50
Managerial Judgment 52
2.3 Why Study the Nature of Managerial Involvement in SIDs? 55
2.4 Conclusions 57
6.2 SID Process 261
6.3 Involvement of Managers in the SID Process 261
6.4 Managerial Judgment and Nature of Involvement 264
6.5 Risk and Returns 271
2.2 CONCEPTS OF INVESTMENT PROJECT ASSESSMENT
2.2.1 Stakeholder concerns and benefit expectations
2.2.2 Project related cost and benefit evaluation
2.2.3 Project feasibility evaluation
3.2.1 Stakeholder concerns and benefit expectations
3.2.2 Analysis of the interview results
3.2.4 Review and decision making
4 CASE NOKIA SIEMENS NETWORKS
4.1 COMPANY CONTEXT
4.2 PROJECT DESCRIPTION
4.3 UTILIZING THE FRAMEWORK
Chapter 7: Discussion of Key Findings 273
7.1 SID Process 275
7.2 Knowledge Adjustment during the SID Process 276
7.3 Managerial Judgment during SID Making 277
7.4 Socio-political Process of Achieving Consensus 279
7.5 Factors that Enable or Inhibit Managerial Judgment and Involvement
8.1 Conclusions from the Key Findings 286
8.2 Possible Implications of the Study 289
8.3 Limitations of the Study 292
8.4 Suggestion for Future Research 293