110 Financial Management
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 is high-tech priority sector
profile.
Strategic management has emerged as a systematic approach in properly positioning
companies in the complex environment by balancing multiple objectives. In practice,
therefore, a comprehensive capital expenditure planning and control system will not
simply focus on profitability, as assumed by modern finance theory, but also on growth,
competition, balance of products, total risk diversification, and managerial capability.
There are umpteen examples in the developing countries Like India where unprofitable
ventures are not divested even by the private sector companies because of their
desirability from the point of view of consumer and employees, in particular and
society, in general. Such considerations are not at all less important than profitability
since the ultimate legitimating and survival of companies (and certainly that of
management) hinges on them. One must appreciate the dynamics of complex forces
influencing resource allocation in practice; it is not simply the use of the most refined
DCF techniques.
Certain other practical considerations are as follows:
l Apart from the profitability of the project, other features like its (projectís)
critical utility in the production of the main product, strategic importance of
capturing the new product first, adapting to the changing market environments,
have a definite bearing on investment decisions. Technological developments
plays critical role in guiding investment decisions. Government policies and
concessions also have a bearing on these.
l Investment in production equipment is given top priority among the existing
products and the new project. Capital investment for expansion in existing lines
where market potential is proved is given first priority. Capital investment in new
projects is given the next priority. Capital investment for buildings, furniture,
cars, office equipments etc., is done on the basis of availability of funds and
immediate needs.
These statements reinforce the need for a strategic framework for problem- solving
under complexities and the relevance of strategic considerations in investment planning.
It also implies that resource allocation is not simply a matter of choosing most profitable
new projects. What is being stressed is that the strategic framework provides a
higher level screening and an integrating perspective to the whole system of capital
expenditure planning and control. Once strategic questions have been answered,
investment proposals may be subjected to DCF evaluation.