Strategic Investment Decisions

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Management Accounting Research , 1996, 7, 199 – 217

Strategic investment decisions: the importance of SCM. A comparative analysis of 51 case studies in U.K., U.S. and German companies C. Carr* and C. Tomkins†

John Shank (in this special edition) summarises the argument for complementing a capital budgeting approach to investment decisions with a broader strategic cost management (SCM) accounting approach incorporating three additional tools— value chain analysis, cost driver analysis and competitive advantage analysis. This article first discusses how this new framework might be assessed empirically and then examines the application of these techniques in practice, drawing on 51 case studies of strategic investment decisions in 44 companies in Britain and Germany (including U.S. subsidiaries in both countries). There are substantial international differences, German companies placing much more emphasis on strategy in their approach. In general, compared with unsuccessful companies, successful companies placed proportionately five times as much attention on the issue of competitive advantage, almost three times as much on value chain considerations and twice as much on cost drivers; commensurably less attention was placed on traditional capital budgeting techniques. Finally, we draw conclusions on the role of the finance function and of such techniques within the context of strategic planning. ÷ 1996 Academic Press Limited

Key words: strategic investment decision; Britain, Germany, U.S.A; vehicle components; financial analysis; discounted cash flow; strategic cost management.

1. Introduction: requirements for an empirical investigation The increasing usage of discounted cash flow techniques in U.K. and U.S. companies has been documented in a number of surveys (Klammer, 1972; Pike, 1983; Klammer and Walker, 1984): by 1986, usage extended to 84% of U.K. companies (Butler et al. , 1993, p. 56). Less is known about their real influence in relation to other more strategically oriented techniques, though a more strategic approach has been thought to have characterised successful German and Japanese companies (Hayes and Abernathy, 1980; Hayes and Garvin, 1982). In the light of Shank’s argument (in this special edition) that NPV techniques need to be complemented by value chain, cost driver and competitive advantage analyses, we * Manchester Business School, Booth St. West, Manchester M15 6PB, U.K. † School of Management, University of Bath, Bath BA2 7AY, U.K. 1044 – 5005 / 96 / 020199 19 $18.00 / 0 ÷ 1996 Academic Press Limited


C. Carr and C. Tomkins

appraise the relative importance in practice of each of these techniques, through case studies of strategic investment decisions in Britain and Germany. We use the term ‘strategic’ to connote investments which have a significant effect on the organisation as a whole and on longer term performance (Marsh et al. , 1988; Ghemawat, 1992; Butler et al. , 1993) and focus accordingly, because these investments are more likely to merit a strategic cost management (SCM) approach. We would expect Shank’s strategic tools of analysis to be less relevant to minor, internally orientated investments; our own pilot studies (Carr et al. , 1991) suggested that strategic investments decisions often do tend to turn on broader strategic considerations, rather than financial analysis. The requirement for more strategic tools of analysis might also be hypothesised to be contingent upon country contexts and upon consequent corporate objectives and management styles. When asked how well does ‘good short-term profits are the objective’ describe your company, only 27% of Japanese companies surveyed by Doyle (1992, p. 21) responded yes, compared to 80% in the U.S.A. and 87% in the U.K. Nissan , for example, deliberately avoids NPV techniques on major investment decisions (Carr and Ng, 1995). German and Continental European companies’ approaches may well be closer to those of Japanese companies in...
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