Tactical and Strategic Decisions

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Investment decisions may be tactical or strategic. A tactical investment decision generally involves a relatively small amount of funds and does not constitute a major departure from what the firm has been doing in the past. The consideration of a new machine tool by a motor manufacturing company is a tactical decision, as is a buy-or-lease decision made by an oil company. Strategic investment decisions involve large sums of money and may also result in a major departure from what the company has been doing in the past. Strategic decisions directly affect the basic course of the company. Acceptance of a strategic investment will involve a significant change in the company’s expected profits and in the risks to which these profits will be subject. These changes are likely to lead stockholders and creditors to revise their evaluation of the company. If a private corporation undertook the development of a supersonic commercial transport (costing over $20 billion), this would be a strategic decision. If the company failed in its attempt to develop the commercial plane, the very existence of the company would be jeopardized. Frequently, strategic decisions are based on intuition rather than on detailed quantitative analysis.

The investment strategy of a firm is a statement of the formal criteria it applies in searching for and evaluating investment opportunities. Strategic planning guides the search for projects by identifying promising product lines or geographic areas in which to search for good investment projects. One firm may seek opportunities for rapid growth in emerging high-technology businesses; another may seek opportunities to become the low-cost producer of commodities with well-established technologies and no unusual market problems; a third firm may look for opportunities to exploit its special knowledge of a particular family of chemicals. A strategy should reflect both the special skill and abilities of the firm...
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