12 Strategic Investment Decisions
We introduced strategy in Chapter 2 to explain its link with achieving shareholder
value. In this chapter we are more concerned with strategy implementation
through capital investment decisions and the tools used to evaluate those decisions.
Strategy
Ansoff (1988) provided a typical description of strategy formulation: objectives
and goals were established; then an internal appraisal of strengths and weaknesses
and an external appraisal of opportunities and threats led to strategic decisions
such as diversification or the formulation of competitive strategy. He established a
hierarchy of objectives that were centred on performance measures such as return
on investment (see Chapter 7, later in this chapter and Chapter 13).
A contrasting approach was developed by Quinn (1980), which he calledlogical
incrementalism. Quinn argued against formal planning systems, which he believed
had become ‘costly paper-shuffling exercises’, observing that ‘most major strategic
decisions seemed to be made outside the formal planning structure’ (p. 2). Quinn
further argued that:
the real strategy tends to evolve as internal decisions and external events
flow together to create a new, widely shared consensus for action among key
members of the top management team. (p. 15)Logical incrementalism is similar to work by Mintzberg and Waters (1985), which
defined strategy as a pattern in a stream of decisions. Mintzberg and Waters
separated theintendedfrom therealizedstrategy, arguing thatdeliberatestrategies
provided only a partial explanation, as some intended strategies were unable to
be realized while other strategiesemergedover time.
The difficulty for businesses in the twenty-first century is that they must
continually adapt to technological and market change, making long-term strategy
problematic. However, to give the external appearance of being well managed
they need to develop strategies, even if only to legitimize what senior managers are
doing. Nevertheless, strategy can be crucial in enabling a business to be proactive
in increasingly competitive and turbulent business conditions. The absence of
strategy can lead to reactivity and a steady erosion of market share.