7.8. Redesign of the Investment Policy

This pattern of stagnation and decline clearly demonstrates the syndrome of growth and underinvestment mentioned at the start of the chapter. Despite huge market potential, the firm fails to achieve even modest growth. Adequate investment is simply not forthcoming. Yet the policy of capacity expansion makes sense in that it responds to realistic pressure from delivery delay. What kind of policy changes can the firm implement to dramatically improve performance and to realise the market potential?

Critics of the firm might argue it is far too inward looking. Capacity expansion relies heavily on evidence from the factory that delivery delay is too high. Surely it would be better to use a forecast of customer orders and build capacity to match. But remember, the top management team adopts a conservative attitude to investment. They listen to the evidence for expansion and discount it. More interesting than a forecast is to explore the effect of softening this conservative attitude. What if it were replaced with an optimistic attitude to approve more investment than factory managers themselves are calling for? This change calls for a fundamental shift in top management attitude to risk – a willingness to invest in capacity ahead of demand (which is rather like believing an optimistic growth forecast). We can test this change in the model by simply reversing the sign on the delivery delay bias.

7.8.1. Top Management Optimism in Capital Investment ...

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