Strategic investment decision-making practices in large manufacturing companies: A role for emergent analysis techniques?

Abstract

Purpose

This paper aims to examine the adoption of conventional and emergent analysis techniques in Strategic Investment Decision-Making (SIDM) practices in large UK manufacturing companies. It aims to update the current knowledge on SIDM practices in large manufacturing companies. The research question underlying this study: Are recently developed analysis techniques (i.e. those that aim to integrate strategic and financial analyses) being used to evaluate strategic investment projects?

Design/methodology/approach

The research evidence underpinning this study was made up of primary and secondary data, quantitative and qualitative. Firstly, a survey consisting of a mailed formal standard questionnaire was conducted where each respondent is required to answer the same questions based on the same system of coded responses. Secondly, qualitative data was collected using the annual reports of selected companies. Disclosures were used as supplementary source of information using the explanatory notes and parenthetical disclosures accompanying companies’ financial reporting. Sources for these disclosures included management discussions, analyses of company strategy and risk and forward-looking reports regarding future performance and growth opportunities (such as mergers and acquisitions activities). Accordingly, companies’ disclosures were used in this study as an alternative method to semi-structured interviews to collect qualitative data. More recently, companies such as Rio Tinto have prepared strategic annual reports for 2017 against the UK Corporate Governance Code (version 2016).

Findings

The choice and use of financial analysis techniques and risk analysis techniques depend on the type of project being evaluated. Decision makers in large UK companies do not appear to use emergent analysis techniques widely. Pre-decision control mechanisms have significant influence on SIDM practices. This includes the changes of internal and external contextual factors, including organisational culture, organisational strategies, financial consideration, comprising formal approval governance mechanisms, regulatory and other compliance policies interact with companies’ internal control systems. Companies incorporate non-financial factors alongside quantitative analysis of strategic investments opportunities. Energy efficiency and carbon reduction are key imperatives of companies’ environmental management. These factors viewed by decision makers as significant factors relevant for compliance with legislation as well as maintaining companies’ legitimacy issues, sustainable business, experience with new technology and improved company image.

Research limitations/implications

High risk, ambiguity and complexity are key characteristics embedded in SIDM processes. Macroeconomic issues remain crucial factors in scanning and screening investment opportunities, as reported by this study. The early stage of SIDM processes requires modelling under macroeconomic scenarios and assumptions of both internal and external parameters. Key assumptions include: projections of economic growth; commodity prices and exchange rates, introduction of technological and productivity advancements; cost and supply parameters for major inputs. SIDM practices rooted on comprehensive knowledge and experience of the industry and markets to draw subjective judgements about the riskiness of prospective projects, but these are rarely formalized into their SIDM processes. Findings of this study, however, remain within the context of UK companies. This study has its own limitations due to its time, location, respondents and sample selection, the size and the sector of the selected companies and questions addressed. Findings of this study raise a call for future research to examine SIDM processes in different settings to explore the relative impact of various organisational control mechanisms on SIDM practices. Also, to examine the influence of contextual factors (such as national culture, political, legal and social factors) on organisational control mechanisms. SIDM practices and processes have received significant attention from researchers, yet there is a lack of evidence in the literature about how companies approach strategic decision-making regarding divestments of some of their strategic investments. This type of strategic decision-making is not less important than other types of SIDM practices.

Practical implications

SIDM practices reflect the art and science of steering and controlling organisational resources to achieve a desired strategy. To understand the factors that shape SIDM practices and align them to organisational strategy, more attention is required to the choice and design of pre-decision controls and to the important role of strategic management accounting tools over the more traditional financial analysis techniques that have formed the focus of much prior empirical research.

Social implications

Key environmental issues viewed by decision makers as significant factors relevant for compliance with legislation as well as maintaining companies’ legitimacy issues and company image.

Originality/value

Despite their perceived importance in this study, quantitative accounting controls may fail to connect with the kind of investment decision-making required to bring strategic success. Indeed, it has been widely noted that financial evaluation techniques are inadequate for assessing strategic investment proposals; they can only function as a guideline, as SIDM practices involve so many uncertainties, risks and judgements. A key insight from this study is that the achievement of integration between the firm’s strategic investment projects and the overall organizational strategy forms a critical pre-decision control on managerial behaviour at an early stage in SIDM practices. As many strategic investment decisions are one-off, non-repeatable decisions, the information needed to support their evaluation is likely to be similarly unique. Sound SIDM practices require the support of a large amount of varied information, a significant proportion of which is collected and analysed prior to potential capital investment projects being considered, such as information related to strategic goal setting, risk-adjusted hurdle rates and the design of appropriate organisational decision hierarchies.

Citation

Alkaraan, F. (2020), "Strategic investment decision-making practices in large manufacturing companies: A role for emergent analysis techniques?", Meditari Accountancy Research, Vol. 28 No. 4, pp. 633-653. https://doi.org/10.1108/MEDAR-05-2019-0484