The role of quantitative analysis (specifically capital investment appraisal) in the process of strategic investment decision-making : New Zealand evidence

Abstract

The opinions of scholars differ regarding the role of capital investment appraisal in strategic investment decision-making. Finance academics regard financial analysis as an active process that both influences and contributes to the decision-making process whereas a number of empirical studies indicate that it may play a more passive role.

This thesis examines eight strategic investment decisions relating to the procurement of real assets, identified a posteriori by decision-makers from six member firms of the Canterbury Manufacturers Association, in order to gain evidence of the role of quantitative analysis (specifically capital investment appraisal) in the process of strategic investment decision-making.

For three of the case firms, where separation between the owners and the firm existed, capital investment appraisal was a requirement of the strategic investment decision-making process. In these cases the payback approach appeared to be the primary evaluation tool with DCF analysis used in a supplementary role. However, the incorrect computation of both the payback period and the DCF analysis in these cases resulted in output of spurious value. In all three cases, the financial evaluation techniques merely complemented the strategic decisions.

Within the three private case firms, direct owner participation-was found to be the principal determinant of the strategic investment decision-making process employed. In these cases, the evaluation of the strategic investment decisions was based on qualitative assessments rather than quantitative assessments and the application of capital investment appraisal techniques was observed to be absent. The nexus of positions held by the decision makers in these cases, e.g., general manager/strategist/owner, enabled them to be involved in both the strategy formulation process and the decision making process.

Organisational learning was found to contribute to the SID-making processes of all of the case firms; it not only predicated the origination of the SIDs, but also occurred during and following the SID-making process. The identification of unanticipated benefits ex post the decision itself added to the knowledge of the decision makers and is anticipated to further enhance the competitive positions of the case firms studied.