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Strategic
Strategic investment decision investment
making: the influence of decision making
pre-decision control mechanisms
133
Fadi Alkaraan
Aleppo University, Aleppo, Syria, and
Deryl Northcott
Auckland University of Technology, Auckland, New Zealand

Abstract
Purpose – This paper seeks to explore how aspects of pre-decision control mechanisms impact
managerial decision-making behaviour with regard to strategic investment projects.
Design/methodology/approach – This study adopted a mixed-method research approach.
Research evidence was collected using a questionnaire survey of 320 large UK companies and eight
semi-structured follow-up interviews with financial directors who responded to the questionnaire.
Findings – The study offers insights into the use and impact of pre-decision control mechanisms
such as: organizational strategy and operating objectives; expectations regarding the involvement of
organizational personnel; formal approval procedures; financial evaluation requirements;
pre-determined hurdle rates; established authorization levels and the influence of managerial intuition.
Originality/value – This study adds to prior understandings of capital investment practice by
employing mixed methods to examine how pre-decision controls shape the outcomes of strategic
investment decision making. Pre-decision controls have received little attention within the prior
literature, which focuses primarily on project financial analysis.
Keywords Strategic planning, Investments, Control systems, Decision making
Paper type Research paper

Introduction
Research on investment decision making has tended to concentrate on the techniques used
for project selection (Klammer and Walker, 1984; Klammer and Wilner, 1991; Kim and
Farragher, 1981; Pike, 1988, 1996; Pike and Wolfe, 1988; Abdel-Kader and Dugdale, 1998;
Arnold and Hatzopoulos, 2000). Yet, few studies have focused on understanding the
management control strategies related to strategic investment decisions (Butler et al., 1993;
Slagmulder, 1997). The primary purpose of management control is to ensure that
managers’ behaviour is consistent with organizational strategies. This can be achieved by
using appropriate control strategies to guide investment decision making, including
pre-decision control mechanisms. These pre-decision controls influence and shape capital
investment decisions before analysis techniques are even applied, by setting limits and
criteria against which projects are evaluated. Examples of such control strategies include

The authors are grateful to Professor Richard Pike (Bradford University, UK) for his advice on Qualitative Research in Accounting &
Management
the questionnaire instrument; Professors Trevor Hopper and Ted O’Leary (Manchester Business Vol. 4 No. 2, 2007
School, UK) for comments on an early draft of this paper; participants at the 2005 British pp. 133-150
q Emerald Group Publishing Limited
Accounting Association Conference for their helpful comments; and the UK managers who 1176-6093
participated in the study. DOI 10.1108/11766090710754204
QRAM setting authorization levels and procedures to be followed, establishing investment
4,2 goals, setting hurdle rates and cash limits, prescribing analysis techniques to be used, and
identifying strategic areas for growth (Butler et al., 1993).
The purpose of this paper is to examine how pre-decision control mechanisms
influence managers’ strategic investment decision-making behaviour. Drawing on the
findings of a questionnaire survey and follow-up interviews, it reports the views of
134 financial directors of large UK companies on the role and significance of various
pre-decision controls. The findings suggest that strategic investment decisions are
partially shaped by pre-decision control mechanisms even before they are subjected to
formal evaluation. This extends prior research, which has focused primarily on the
financial analysis of investment projects, to highlight the choice and design of
pre-control mechanisms as an important, but under-researched, aspect of strategic
investment decision making.
The reminder of this paper is organized in five sections. The first provides an
overview of relevant literature. Section two outlines the research questions that formed
the focus of this study. Section three presents the method employed for this study,
including sample selection and data collection. Section four reports the results and is
followed by conclusions in section five.

Prior research: a focus on financial analysis

Strategic investments are substantial investments that involve high levels of risk,
produce outcomes that are difficult to quantify, and have a significant long-term
impact on corporate performance. Typical examples include company acquisitions and
mergers, the introduction of major new product lines, the installation of new
manufacturing processes, the introduction of advanced manufacturing and business
technologies, and substantial shifts in production capability (Butler et al., 1991;
Slagmulder et al., 1995; Papadakis et al., 1998; Horngren et al., 2002). Given the nature
and impact of these investment decisions, they must be closely aligned to
organizational strategy in order to advance the organization’s intended aims.
Much empirical research into capital investment practice has focused on the use of
financial analysis techniques for evaluating investment proposals (see, for example,
the following UK studies: Pike and Wolfe, 1988; Pike, 1988, 1996; Pike et al., 1989;
Ho and Pike, 1991, 1992; Lefley, 1994; Abdel-Kader and Dugdale, 1998; Arnold and
Hatzopoulos, 2000, Alkaraan and Northcott, 2006). However, formal appraisal is but
one stage in the capital investment process and financial analysis techniques are only
one control mechanism designed to guide decision making. Researchers have noted
that, although financial analysis techniques might constitute a framework within
which to formalise investment decisions, the techniques are unlikely to determine the
decision outcomes, particularly for strategic-type projects (Bromwich and Bhimani,
1991; Butler et al., 1993; Shank and Govindarajan, 1992, 1993; Carr et al., 1994; Shank,
1996; Carr and Tomkins, 1996, 1998; Alkaraan and Northcott, 2006).
A broader perspective on the factors shaping strategic investment decisions can
be achieved by viewing them not only as a financial analysis task, but also as
a management control issue. In general terms, it has been suggested that linking
management control systems and strategy is essential for firms to attain a position of
competitive advantage (Nyamori et al., 2001), with some studies (Simons, 1990) having
examined the relationship between strategy and management control systems using
a largely contingent approach. In regard to investment decision making, appropriate Strategic
management controls can help provide strategic guidance, yet few studies have investment
focused on understanding management control strategies related to investment
decisions (Butler et al., 1993; Slagmulder, 1997). Slagmulder (1997, p. 103) has decision making
noted that:
As strategic investment decisions involve large sums of money and have a significant impact
on the firm’s competitive position and future operating performance, they constitute an 135
important business activity over which effective control must be exercised to help ensure the
quality of the firm’s investment programmes.
This study focuses on those “pre-decision” control mechanisms that impact across
various stages of the strategic investment decision-making process and help to shape
its outcomes. These controls establish pre-conditions that determine:
.
whether an investment project is identified as worthy of formal, financial
evaluation; and
.
the criteria against which it will evaluated and selected.

The impact of these pre-decision controls has received little attention from empirical
researchers; this paper aims to address this gap.
The capital investment literature has, over many years, pointed to aspects of the
investment decision-making process that might be considered to act as pre-decision
controls. First, the need to align the investment decision process with the firm’s
strategy is well recognised (Slagmulder et al., 1995; Slagmulder, 1997; Abdel-Kader and
Dugdale, 1998). This suggests that an organisation’s strategic goals, and the operating
objectives that flow from it, act as pre-decision controls that shape the selection and
evaluation of investment projects. Also, formal organizational procedures dictate the
approach taken in justifying and analysing a potential investment by setting
pre-determined expenditure authorization levels, specifying accepted financial and risk
analysis tools, and setting project hurdle rates (McIntyre and Coulthurst, 1987; Pike,
1988; Arnold and Hatzopoulos, 2000). All of these factors help to shape the investment
choices made. Further, organizational policies regarding who (by role and/or seniority)
is involved in the decision-making process will go on to shape decision outcomes
(Petty et al., 1975; Scapens and Sale, 1981). The style of intuitive judgement exhibited
by key organizational decision-makers can also act as a pre-decision control,
influencing which projects are perceived as having “strategic” merit (Alkaraan and
Northcott, 2006).
Drawing on these factors identified in the literature, Figure 1 shows an overview of
how organizational pre-decision control mechanisms might influence managerial
behaviour at the various stages of the strategic investment decision-making processes.
The preceding discussion has revealed the following key issues in regard to the
analysis of strategic investment decisions. First, since effective investment decision
making is vital for the long-term strategic direction of an organization, it cannot be
seen as an independent activity but is an integral part of an organization’s strategy.
Second, an appropriate management control system is a key means of providing
adequate strategic guidance to the investment process. Therefore, it is appropriate to
explore the relative impact of various organizational control mechanisms on strategic
investment decision making. Third, while the use of financial analysis has been well
QRAM
4,2 Organizational
Control
Systems

136
Post-decision
Pre-decision control mechanisms
control to monitor the
mechanisms performance of the
project

- Organizational - Pre-determined - Performance

strategy financial analysis objectives
- Involvement of techniques - Hierarchy of
managers at various - Risk analysis approval authority
organizational levels - Hurdle rates - Strategic fit
- Formal procedures - Intuitive judgement

Figure 1.
The influence of
pre-decision control
mechanisms on the Identification Evaluation Selection Implementation
strategic investment
decision-making process Strategic investment decision-making process

examined in the capital investment literature, limited attention has been paid to other
stages of the investment decision-making process such as: the initial development of
investment proposals; their early screening to ensure that they are compatible with
organizational strategy; and those aspects of project selection that are shaped by
prescribed evaluation and authorization routines (Arnold and Hatzopoulos, 2000).
These pre-decision controls are likely to have a significant impact on investment
decision-making processes and outcomes.

Research questions and method

To address the lack of attention to the role and impact of pre-decision control
mechanisms, this study focused on the following research questions:
RQ1. To what extent do managers view strategic investment decisions as a matter
of financial evaluation?
RQ2. To what extent do organizational pre-decision control mechanisms influence
managerial behaviour in regard to strategic investment decision making?
This study adopted a mixed-method research approach, suited to the changing needs Strategic
of the research as it developed. The research evidence was collected from both a mailed investment
questionnaire survey and semi-structured follow-up interviews. This combination of
data collection methods overcomes some of the inherent disadvantages of each decision making
individual method via data triangulation (Neuman, 1991; Miles and Huberman, 1994;
Ryan et al., 2002). As Silverman (2001) notes, qualitative and quantitative methods of
data collection can combined for pragmatic reasons in order to address different 137
research objectives. In this study, the interviews allowed survey responses to be
probed, extended and clarified, adding to our understanding of issues that concern
decision-makers in practice.

Survey questionnaire
Ten statements on strategic investment decision-making processes were adopted
from previous surveys of capital budgeting practice (Slagmulder et al., 1995;
Van Cauwenbergh et al., 1996) and from our own experience in the field. Adopting or
adapting questions from previous related studies was necessary to compare our
findings with previous related studies and to allow reliability to be assessed. Questions
concerning these statements required managers to indicate their level of agreement
with a statement by assigning a score on a five-point Likert scale (where 1 indicated
“strongly disagree” and 5 denoted “strongly agree”).
The study sample was selected from the largest UK manufacturing companies on
the assumption that these firms make substantial capital investment expenditures and
could be expected to undertake strategic investment projects. Our sample comprised
top managers in 320 companies selected from eight different manufacturing groups in
the Financial Analysis Made Easy (FAME) database using the standard industrial
classification, UK-code-1992. The FAME database is a computerised service provided
by CD-ROM Publishing Co. Ltd (London) and Jordan & Sons Ltd (Bristol). The database
identifies companies by criteria such as industry, geographical area, turnover and
number of employees and provides monthly updated information.
The selected companies satisfied the following criteria:
.
minimum turnover of £100 million for the year ended 2001;
.
minimum of 1,000 employees for the year 2001; and
.
minimum total assets of £50 million for the year 2001.

A covering letter attached to each questionnaire outlined the purpose of the survey and
assured the confidentiality of the information supplied by each respondent. A follow-up
fax was sent to non-respondents on 12 December 2002 and further reminders were sent
out on 17 December. By the end of January 2003, 132 questionnaires had been received,
giving a response rate of 41.25 per cent. The sample size dropped from 320 to 271 because
49 questionnaires were returned unanswered. So, 83 usable questionnaires were
included in the analysis giving a net usable response rate of 30.63 per cent (83 completed
questionnaires/271 potential respondents). This response rate is comparable with those
of prior similar surveys (Lefley, 1994; Chen, 1995; Slagmulder et al., 1995; Joseph et al.,
1996; Abdel-Kader and Dugdale, 1998; Arnold and Hatzopoulos, 2000).
The possibility of non-response bias was examined by comparing the 83 responding
companies to the total sample in regard to their turnover, number of employees and
total assets. The results of parametric independent t-tests indicated that there is no
QRAM statistically significant difference between the means of the responding companies and
4,2 the total sample in terms of turnover ( p-value ¼ 0.651), total assets ( p-value ¼ 0.414)
and number of employees ( p-value ¼ 0.587). To further examine the possibility of
non-response bias, answers to survey questions from respondents who replied without
follow-up reminder (62 companies) were compared with answers from respondents
who replied only after the reminder (21 respondents). There was no significant
138 difference between the two groups of answers. These results suggest that more
respondents would not have changed the results of the study.

Follow-up interviews
All respondents to the survey questionnaire were asked to indicate whether they were
willing to participate in a follow-up interview; only eight said they were. These eight
respondents were from companies in the chemical (three), machinery (two),
beverage, vehicles and mining industries. They were interviewed during
July-September 2003 – seven by telephone and one face-to-face according to the
respondents’ preferences. The purpose of the follow-up interviews was to explore
questionnaire responses in greater depth and to seek elaboration on respondents’
perceptions of their strategic investment decision-making experiences.
Each interviewee was provided with a copy of the interview questions (Appendix)
in advance of the interview. These questions served as a checklist to ensure that all
relevant issues were covered during the interview, but were addressed with a
considerable degree of flexibility. That is, if an interviewee showed interest in a specific
issue and wished to discuss it further, he or she was encouraged to do so. On the other
hand, if the interviewee was unwilling or unable to say much on an issue, the question
was not pursued. In addition to the specified questions, other relevant issues that arose
were included in the discussion. All interviews were tape-recorded and later
transcribed.
Where appropriate, excerpts from the interviews are used to illustrate the points
made in discussing the findings. The identities of the participating organizations
are disguised for confidentiality reasons. All organizations are referred to by their
industry only.

Findings
Figure 1 shows an overview of how organizational pre-decision control mechanisms
might influence managerial behaviour at the various stages of the strategic investment
decision-making process. Each of these pre-decision control dimensions is now
considered in relation to the questions posed in the questionnaire survey.

Managerial participation and the use of formal procedures

Managers participating in the survey were asked to indicate their level of agreement
with the following two statements:
.
We have formal procedures for evaluating strategic investment decisions.
.
Lower level managers in the organization are involved in strategic investment
decisions.

The results are shown in Table I. Interviewees were subsequently asked to provide
their comments on these results.
 Strategic
(1) (5)
Strongly (2) (3) (4) Strongly Mean investment
disagree Disagree Neutral Agree agree score decision making
(per cent) (per cent) (per cent) (per cent) (per cent) (out of 5)

We have formal procedures

for evaluating strategic 139
investment decisions – 3.6 7.2 48.2 41.0 4.2651
Lower level managers in the Table I.
organization are involved in Managers’ perspectives
strategic investment decisions 1.2 16.9 19.3 47.0 15.7 3.5904 on formal procedures

The majority of managers (89 per cent) agreed that they had formal procedures for
evaluating strategic investment decisions. They also agreed (62 per cent) that lower
level managers in the organization were involved in strategic investment decisions. All
eight financial managers involved in the follow-up interviews noted that their
organization specified a standard presentation format for investment proposals. Most
also had standard procedures that contained instructions on how to perform a detailed
project analysis and how to deal with the key issues of project benefits, costs and risks.
This suggests that originators of investment proposals in these organizations were
required to describe and justify of the proposed investment according to
pre-determined guidelines. The interviews reinforced that identifying investment
opportunities tended to be the responsibility of the business unit, with other
organizational group(s) taking the lead on project evaluation:
The Corporate Department is usually involved in evaluating strategic investment decisions,
with participation from Finance and from the Chief Executive’s Office. We have an internal
department of four people who are responsible for looking at acquisition and investment
opportunities in the business. They report to me and the Chief Executive Officer
(Vice President Group Finance Director, Chemicals Company).
The business unit identifies investment opportunities in general and proposes the ideas to the
Business Evaluation Department and the technical evaluation groups . . . We evaluate
business proposals using consistent guidelines developed by [the company]. Evaluation
guidelines used when considering a project are not simply to create value, but to define the
project in a way that maximises value . . . the guidelines incorporate a valuation methodology
that includes net present value, cash flows and the earnings effect of an investment. The full
range of economic and non-economic impacts of the project will be evaluated. Those will all
then be reflected in the proposal that comes to the investment committee (Business
Development Executive, Business Evaluation Department, Mining Company).
In both of these cases business proposals were evaluated using consistent guidelines
developed by the company. These pre-decision guidelines shaped the outcome of
decisions made and so were a major influence on strategic investment decision making
within these organizations.
Managers in different functional positions may have different perceptions of criteria
used to evaluate strategic investment decisions due to their varying goals and interests
that result from functional, hierarchical, professional and personal factors (Dean and
Sharfman, 1996). For example, an engineering company participating in this study had
an organizational hierarchy regarding identifying investment opportunities, but each
QRAM business unit prepared budgets and financial plans in accordance with a defined
4,2 format, which included the consideration of risks. Management at the corporate centre
reviewed the budgets and financial plans with the business units and a summary was
presented to the board for approval:
In general, there are two levels of identifying strategic investments: (1) the individual
business, which generally concentrates on the competitive position; and (2) the corporate
140 level, which assesses whether the investment will generate sufficient returns for their
shareholders . . . The individual business is basically identifying investments for each
business and in the right place, because it interfaces directly with the market. And there is the
corporate level of [the company], which has to assess whether we are placing our resources in
that area which is going to generate the greatest returns for our shareholders (Group Finance
Director, Engineering Company).

The use of financial analyses

An important component of strategic investment analysis is financial evaluation by
means of techniques such as net present value (NPV), internal rate of return, payback
period and accounting rate of return. A study by Van Cauwenbergh et al. (1996)
suggested that these financial evaluation models play an important role in strategic
investment decision-making processes and are often used in the early analysis of
projects (72 per cent of their respondents indicated this), with a smaller proportion of
their respondents (34 per cent) indicating that financial evaluation models are seldom
used in the final choice of investment projects.
To examine the extent to which managers view strategic investment decisions as a
matter of financial evaluation, respondents were asked to provide their views on three
statements concerning the use of financial evaluation models (statements 1 and 2 were
drawn from Van Cauwenbergh et al., 1996):
.
Financial evaluation techniques are often used in the early analysis of strategic
investments.
.
Financial evaluation techniques are often used in the final choice of strategic
investments.
.
A strategic investment proposal will be rejected if its expected financial return
does not meet the minimum requirements of return on investment.

Table II shows the extent of agreement with each statement. In contrast to

Van Cauwenbergh et al.’s earlier results, a high proportion of respondents indicated that
financial evaluation techniques are used in the final evaluation of strategic projects,
with somewhat fewer indicating their use in the early analysis stage. Most respondents
also agreed that a strategic investment proposal will be rejected if its expected financial
return does not meet the minimum requirements of return on investment.
In the follow-up interviews managers were asked to comment on the above results.
Most believed that financial evaluation was a key means of assessing strategic
investment proposals and that an investment proposal must show sufficient
profitability to be implemented:
Our investment decisions are very much made on a financial basis and we don’t tend to make
decisions that don’t have a positive NPV (Business Development Executive, Business
Evaluation Department, Mining Company).
 Strategic
(1) (5)
Strongly (2) (3) (4) Strongly Mean investment
disagree Disagree Neutral Agree agree score decision making
(per cent) (per cent) (per cent) (per cent) (per cent) (out of 5)

Financial evaluation techniques

are often used in the early 141
analysis of strategic investments – 8.4 14.5 53.0 24.1 3.9277
Financial evaluation techniques
are often used in the final choice
of strategic investments – 2.4 3.6 41.0 53.0 4.4458
A strategic investment proposal Table II.
will be rejected if its expected Managers’ perspectives
financial return does not meet the on the influence of
minimum requirements of return financial evaluation
on investment – 12.0 12.0 50.6 25.3 3.8916 models

Financial return is of supreme importance. It’s the most important factor that we look at when
we think about new projects. If we can’t come up with a financial rationale for the project,
then in almost all circumstances we won’t go ahead with it (Group Finance Director,
Manufacturing Company).
However, 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, since strategic investment decisions involve so many
uncertainties, risks and judgements (Butler et al., 1991; Carr et al., 1994; Horngren et al.,
2002; Dempsey, 2003; Alkaraan and Northcott, 2006).
Uncertainty, in particular, is perceived as an unavoidable element of strategic
investment decision making. Uncertainty concerns the difficulty of determining the
validity of inputs, i.e. gathering data and information on the decision process. In some
cases, it is just not possible to get complete information about the project being
considered. Also, managers suffer from cognitive limitations that prevent them from
following a completely rational-analytic approach. Accordingly, they satisfice rather
than optimise in their information search behaviour and may not be sure of the
reliability of the information that underpins their capital investment decisions. For
example, a Pharmaceutical Company participating in this study spent more than
$3 billion on R&D in 2002, but as a result of the complexities and uncertainties
associated with pharmaceutical research could not be sure that products currently
under development would achieve success in laboratory, animal or clinical trials and be
granted the regulatory approvals needed to market them successfully:
There is a lot of uncertainty as to future production and prediction, and of course one is
placing enormous reliance on the judgements of the management team that are making the
proposal (Group Finance Director, Pharmaceutical Company).
Other interviewees acknowledged the need to progress decisions in the face of
uncertainty, despite the unreliability of financial analyses:
QRAM If you want to prepare to make an investment by collecting all the information you might
want and being 100 per cent happy with the integrity of that information, you might
4,2 considerably minimise the risk, but it’s likely that you’ll miss the opportunity because you
spend so much time gathering the information (Group Finance Director, Engineering
Company).
The findings of this study in regard to the use of financial analysis techniques do not
142 seem to accord with those of Van Cauwenbergh et al. (1996), therefore. Although
financial analysis does seem to play a pre-decision control role in many firms, it is
generally perceived as more influential in the final project evaluation and approval
stages and somewhat less timely and useful as a pre-decision control tool.

Risk and hurdle rates

As noted, strategic investments are often highly uncertain. They also tend to present
high levels of risk. Financial risk, operational risk (e.g. concerning new products or new
technologies), commercial risk (related to suppliers and customers), strategic risk,
political risk and contingent risk all surround strategic capital investment projects.
The notion of “risk” in this context refers to the fact that managers are uncertain about
the cash flows to be generated by the investment projects, which may involve adverse
consequences or losses. Capital investment theory proposes the use of different
discount rates for different types of strategic investment projects to account for risk,
advising that each investment project should be evaluated at its own opportunity cost
of capital. In practice, methods for determining the “hurdle rate” or “discount rate”
have been found to vary widely (Slagmulder et al., 1995).
While the issue of how risk-adjusted hurdle rates are set was not examined in the
survey questionnaire, it emerged as relevant during the follow-up interviews.
Interviewees indicated that they used a higher discount/hurdle rate for strategic
investment projects than for non-strategic projects. For example, in a participating
Chemical Company if a capital investment is entirely internal to the company, then
mangers will use their own cost-of-capital calculations. If it is an external investment
where there will be acquisitions or joint ventures, then they will use this plus or minus
a risk factor:
We probably use a minimum discount rate of between 9 and 10 per cent. It could be a little bit
lower if it is something that is really very easy for us to see, very easy for the cash to come
out. Generally, this depends on the cost of capital for the business, where the investment is
and the risk associated with it. But our cost of capital is 10 per cent or under. So, on some
investments where you can see the cash coming out very quickly, then there is no need to
have a high risk factor on it (Vice President Group Finance Director, Chemical Company).
Another interviewee indicated that perceived risk is incorporated into the investment
hurdle rate:
If it’s a project in a high risk country, then we will think more closely about it. We’ll look at
the premium of government bonds over US bonds and things like that to give us a measure of
the way the market’s looking and the financial risk in that country (Business Development
Executive, Business Evaluation Department, Mining Company).
Another company took a different approach, dealing with risk more subjectively via
the strategic planning process rather than quantifying it in hurdle rates:
 Strategic risk is taken into account when we are developing or formulating the strategy of the Strategic
business, such as the impact of competition or the impact of changing regulation; all these
things are considered as strategic risks and must be taken into account when we are investment
developing or formulating the strategy of the business (Group Finance Director, decision making
Pharmaceutical Company)
Regardless of the method used to account for project risk, the majority of the
respondent companies used hurdle rates or other risk considerations as a pre-decision 143
control, i.e. setting the rate or criteria prior to even considering a project. However, the
specific risk characteristics of a project could lead to some “tweaking” of the discount
rate applied, suggesting that hurdle rates are perhaps less of a formal management
control than might be anticipated from capital investment theory.

Organizational strategy and operating objectives

While financial evaluation models are perceived as a useful aid at the decision moment,
it might be expected that strategic investment decisions are substantially shaped by
company strategy. Further, the organizational objectives that flow from strategy
constitute a pre-decision control that defines the boundaries and parameters against
which strategic capital investment decisions are taken. For example, an organization
concerned with profitability, survival, growth, or technological leadership is likely to
favour investment projects that advance those objectives.
To examine the extent to which strategic investment projects fit with organizational
strategy, managers were asked to indicate their agreement with the following
statements:
.
Strategic investment decisions derive from an explicit corporate strategy.
.
A strategic investment proposal whose expected financial return meets the
minimum requirements can be rejected if it does not fit with the firm’s
competitive strategy.

Table III shows the responses to each statement.

These results suggest that many strategic capital projects are shaped by the
pre-decision control of a known organizational strategy and that few projects will be
accepted if they fail to accord with that strategy. Comments made in follow-up

(1) (5)
Strongly (2) (3) (4) Strongly Mean
disagree Disagree Neutral Agree agree score
(per cent) (per cent) (per cent) (per cent) (per cent) (out of 5)

Strategic investment decisions

derive from an explicit
corporate strategy 2.4 6.0 10.8 55.4 25.3 3.9518
A strategic investment proposal
whose expected financial return
meets the minimum requirements Table III.
can be rejected if it does not fit Managers’ perspectives
with the firm’s competitive on project fit with
strategy – 4.8 1.2 69.9 24.1 4.1325 organizational strategy
QRAM interviews support this strong indication that investment and organizational strategy are
4,2 perceived as strongly linked:
There is a strategy for the company that guides the sort of project we’ll look at. I guess we
have a fairly clear view about the sort of projects that we’ll look at and that fit with the
company’s strategy, and if it falls outside these sorts of projects, then we wouldn’t go ahead
with it (Business Development Executive, Business Evaluation Department, Mining
144 Company).

There is a long-term business strategy and there is an annual plan which is obviously
consistent with strategy. We have a strategy that is revisited every year by the board, and
there is an annual plan approved by the board, which is consistent with strategy. All
investments really must be aligned with that strategy (The Vice President Corporate Finance,
Pharmaceutical Company).
The formulation of strategic goals and priorities can, therefore, be seen as an influential
pre-decision control in the strategic investment process, having a significant impact on
investment choices before projects are even evaluated and often superseding the
importance of financial analysis outcomes.
To identify the key organizational objectives that shape capital investment
decisions, respondents were asked to indicate the recent (i.e. over the past five years)
importance of various indicators of a capital project’s contribution to their company’s
success. Suggested indicators included: profitability (net profit), efficiency (low costs),
growth (increase in total assets/sales), shareholder wealth (dividends plus share price
appreciation), utilisation of resources (e.g. ROI), economic value added, market
leadership (market share), technological leadership (innovation, creativity) and
survival (avoiding bankruptcy). The results are shown in Table IV.

(2)
(1) Below (3) (5) Mean
Not average Average (4) Very score
important importance importance Important important (out of 5)
(per cent) (per cent) (per cent) (per cent) (per cent) (per cent)

Profitability (net profit) – 2.4 1.2 42.2 54.2 4.4819

Efficiency (low costs) – 3.6 13.3 60.2 22.9 4.0122
Growth (increase in total
assets, sales) 3.6 4.8 19.3 51.8 20.5 3.8072
Shareholder wealth
(dividends plus stock price
appreciation) 4.8 2.4 38.6 33.7 20.5 3.6265
Utilisation of resources
(ROI) 2.4 42.2 22.9 24.1 8.4 2.9398
Economic value added
(EVA) 8.4 41.0 22.9 18.1 9.6 2.7952
Table IV. Market leadership
Managers’ perceptions of (market share) 1.2 44.6 16.9 26.5 10.8 3.0120
key indicators of a capital Technological leadership
project’s contribution to (innovation, creativity) 3.6 44.6 30.1 16.9 4.8 2.7470
company success (over Survival (avoiding
the past five years) bankruptcy) 67.5 18.1 4.8 7.2 2.4 1.5904
The results show that profitability (net profit), efficiency (low costs) and shareholder Strategic
wealth (dividends plus share price appreciation) are the key contributions to investment
organizational success that managers look for in strategic investment projects. These
results are not surprising, because short-term profit has previously been found to be a decision making
crucial factor shaping investment decision making in UK companies (Carr and
Tomkins, 1996). An interviewee confirmed the pre-decision control role of these
organizational objectives in shaping capital investment choices: 145
Investment proposals have to focus on the market and why they believe that market to be
attractive and how it is adding value to the customer’s business. They have to focus on cost
saving and flexibility of manufacturing. All these criteria must be taken into account and
included within the capital expenditure proposals. But the ultimate focus is on making sure
that we can get the financial return on the investment. At the end of the day, the financial
return is the consequence of all the business decision that you make. Otherwise you will not
be in the business (Group Finance Director, Engineering Company).
The findings of this study suggest that decision-makers are influenced by a raft of
organizational objectives and take an unfavourable view of projects that seem unlikely
to advance them. The strong emphasis on financial objectives (e.g. profitability, cost
efficiency and shareholder wealth maximisation) may reflect the fact that managers’
performance is often evaluated on the basis of short-term accounting criteria, which
may not be completely aligned with the long-term goals and strategies of the firm. It
appears, therefore, that organizational strategy and performance objectives act as
strong pre-decision controls to shape decision-makers’ perceptions of strategic
investment projects.

Approval authorities and managerial intuition

Following their evaluation and consideration at various levels in the organization,
strategic investment projects usually progress up the organizational hierarchy until
finally approved or rejected. The board of the company usually approves major
investments and acquisitions and is ultimately accountable to the shareholders for the
performance of the business. To examine the influence of the most senior managers
over capital investment resources and decision-making processes, we asked managers
to indicate their level of agreement with the following statements:
.
Strategic investment decisions emerge through the formal planning processes of
our firm.
.
The evaluation of strategic investments is left to the judgement of top
management.
.
A strategic investment proposal whose expected financial return meets the
minimum requirements of return on investment can be rejected if it does not
satisfy the expectations and intuition of the top managers.

Table V shows the responses to each statement.

Since, strategic investment decisions require a solid understanding of the
organization’s objectives, as well as an understanding of the environment in which
the organization operates, it is not surprising that such investment decisions are
usually authorised by senior executives at the top level of the organization’s hierarchy.
The use of decision authority is a major aspect of how pre-decision control mechanisms
QRAM
(1) (5)
4,2 Strongly (2) (3) (4) Strongly Mean
disagree Disagree Neutral Agree agree score
(per cent) (per cent) (per cent) (per cent) (per cent) (out of 5)

Strategic investment decisions

146 emerge through the formal
planning processes of our firm – 9.6 10.8 53.0 26.5 3.9639
The evaluation of strategic
investments is left to the
judgement of top management 2.4 28.9 27.7 33.7 7.2 3.1446
A strategic investment proposal
whose expected financial return
meets the minimum requirements
Table V. of return on investment can be
Managers’ perspectives rejected if it does not satisfy the
on project approval expectations and intuition of the
hierarchies top managers – 9.6 19.3 55.4 15.7 3.7711

influence managers’ behaviour. Where strict authorization controls exist over

resources, these formal systems for authorising capital expenditure restrict the
independence of divisional managers. The ultimate authority for strategic investment
projects rests with top management, with only a limited amount of this authority
delegated to lower level managers according to pre-determined spending limits
assigned to different hierarchical levels. For example, the Group Finance Director at a
Manufacturing Company noted his organization’s strict hierarchy of approval for
capital projects:
We have strict authorisation control for capital investment. The company Managing Director
will be allowed to spend up to certain level and above that the Divisional Managing Directors
have a certain authority level. Above that it’s the Chief Executive, and beyond £500,000 it
goes to the complete Board of Directors. We have a hierarchy of approval authorities (Group
Finance Director, Manufacturing Company).
Expenditure approval limits can vary significantly across firms. In contrast to the
above manufacturing company example, Business Unit Managing Directors at a
mining company had the authority to approve any capital project up to $US20 million,
with anything over $US20 million going to the Business Evaluation Department for
evaluation and approval:
There is a whole range of approval processes so at some point, for example up to $20 million,
the product group CEO has authority to approve it . . . Above $20 million, it needs to
come to the investment committee in London (Business Development Executive, Business
Evaluation Department, Mining Company).
Although key input to strategic investment analysis and decision making may be made
at lower levels in the organization (29 per cent of respondents), the findings of this study
suggest that it is not merely “rubber stamped” at the executive level. Strategic
investment decisions are often matters of judgement based on experiences and shared
assumptions about likely future events. Top managers often screen projects not
according to expected financial outcomes, but according to the pre-decision control of
how well the projects “fit” with their leadership visions or beliefs. Intuition appears to be Strategic
a significant factor in the process of strategic investment decision making. investment
decision making
Conclusion
Strategic investment decision making draws on expertise from a range of personnel
including production and marketing specialists, engineers, managers throughout the
organizational hierarchy, and the board of directors. Although many prior studies have 147
examined the impact of financial evaluation techniques on the investment choices
made by these organizational actors, how investment decisions take shape depends
also on the decision objectives, strategies and procedures employed to guide choices
and to harmonise different views. This study has drawn on a combination of survey
results and semi-structured interviews to explore managers’ perceptions of how these
pre-decision controls influence strategic investment decisions. The use of follow-up
interviews added depth to the survey results by probing exactly how and why
managers perceive pre-decision controls to influence their decision-making behaviour.
Although securing access to busy senior managers can be challenging, we recommend
that future researchers in this field make similar use of follow-up interviews as a means
of addressing the potential shortcomings of survey research methods.
The findings reveal that pre-decision controls, in a variety of forms, have a
significant impact on how organizational actors view and evaluate strategic capital
investment projects. The capital budget and capital expenditure limits at different
hierarchical levels emerge as among those traditional accounting-based control
systems most frequently used to guide the investment decision process. Formal project
appraisal procedures, standard formats for investment proposals, hurdle rates, and
pre-set authorization levels are also major pre-decision control mechanisms that
influence managerial behaviour at an early stage in the investment process. 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 the investment
process, since organizational strategy is usually set in advance of capital projects being
considered.
Since, many strategic investment decisions are one-off, non-repeatable decisions, the
information needed to support their evaluation is likely to be similarly unique.
The necessary relevant information for such strategic investment decisions cannot
usually be captured by financial evaluation only. Rather, sound strategic decision
making requires 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 organizational decision hierarchies.
Indeed, the significant influence of such pre-decision controls suggests that strategic
investment decisions are partially shaped even before they enter the formal evaluation
stage, and rely only in part on the outcomes of formal financial analysis. In order
to understand the factors that shape strategic investment decisions and align them to
organizational 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.
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Appendix

150
Interview questions on Your organization’s strategic investment decisions
The primary purpose of this interview is to explore and expand on the responses you provided to our
earlier mailed questionnaire. The key questions we will cover are:

1. How does your company identify and select strategic investment opportunities?
2. If your organization had formal procedures for evaluating strategic investment decisions, how
do you think they impact on the investment decision-making activity?
3. How are various managers and personnel, at different levels of the organization, involved in (i)
proposing and (ii) deciding on potential investment projects?
4. Why are the chosen financial analysis techniques (as per your questionnaire response) used?
Does the analysis depend on the particular project, or are there specified organizational
guidelines?
5. What influence do you think financial analysis results have (i) at the early stage of investment
analysis and (ii) in the final choice of investments?
6. How important is a project’s expected financial outcome to the accept/reject decision? What
other aspects of a project might make it appealing or unappealing?
7. How is corporate strategy taken into account in making investment decisions?
8. Do you think managerial intuition plays a big role in your organizations’ strategic investment
decision making? Or are decisions guided more by formal systems and analysis than by
managerial judgement?

Table AI. There will also be the opportunity to discuss any other issues that you consider important in how your
Questions provided to organization makes strategic investment decisions
participants in the
follow-up interviews Thank you for your participation

Corresponding author
Deryl Northcott can be contacted at: deryl.northcott@aut.ac.nz

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