Accounting for Managers: Interpreting Accounting Information for Decision Making, 4th Edition

Chapter 14

Strategic Investment Decisions

We introduced strategy in Chapter 2 to explain its link with achieving shareholder value. One of the most important elements of strategy implementation is capital investment decision making, because investment decisions provide the physical infrastructure through which businesses produce and sell goods and services. This is the topic of this chapter. In evaluating capital expenditure decisions, we compare three techniques: accounting rate of return; payback; and discounted cash flow techniques to see how investment decisions are evaluated.

Strategy

The traditional approach to strategy formation was described by Ansoff (1988). This approach reflected the cybernetic approach to management control introduced in Chapter 4. For Ansoff, strategy formulation involved setting objectives and goals; and carrying out an internal appraisal of strengths and weaknesses and an external appraisal of opportunities and threats. This led to strategic decisions such as diversification and the development of competitive strategy. A contrasting approach was developed by Quinn (1980), which he called logical 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 ...