Investment

Investment takes place alongside strategy. Investment is the process of committing time, energy, resources and money in the expectation of returns; and these returns require defining as precisely as possible.

There is always a financial drive at the core of returns on investment. Additionally, returns on investment are measured in terms of:

·         incremental returns, in which initiatives are undertaken in the expectations of derived and future returns;

·         if an organisation chooses to work in a particular sector, then it must be prepared to accept the returns that are on offer; if an organisation requires specific returns, then it must operate in those sectors in which those returns are possible.

Because of the nature of business and organisational activities, it is usual to define returns within ranges or parameters. These ranges and parameters require extensive evaluation. This is to ensure that when decisions are taken to proceed, organisations and their managers have the clearest possible knowledge and understanding of what they have chosen and why, the opportunities and consequences, and where and how what is proposed is likely to lead.

A strategic management approach to the effective consideration of ventures and proposals requires consideration of the following factors.

·         Assessment of the range of returns possible, both positive and negative and in financial and non-financial terms.

·         Attention to the behavioural aspects of the venture or proposal (eg who is driving it, who is opposing it and why).

·         Assessments of the risks involved in the new venture or proposal.

·         Definitions of success and failure; and assessment of the consequences of success, and the consequences of failure.

It is at this point that general levels of acceptability or otherwise of involvement in the venture or proposal will become clear. Additionally, the organisation now ought to be able to determine the length of time for which investment is required, and the extent to which this may contract, and especially the extent to which this may extend.

It is also essential to determine at this point whether possible variations are going to be acceptable. For example:

if a return of 10% per annum is acceptable, and anything less is unacceptable, what is the attitude to an actual return of 9.9%? 9.5%?  The likelihood, or otherwise, of hitting a target at the point of bare acceptability therefore needs further consideration;

·         if a return of 10% is 'beyond the wildest dreams', and analyses then predict or strongly indicate that this is likely, it then becomes necessary to consider whether further funds or resources should be put into the particular venture or proposal;

·         if a return of 10% is decided, then it needs to be clear why this figure was arrived at, and why it represents an effective return (why 10%, why not 9% or 11%).

In many cases it therefore becomes tempting (from a behavioural perspective) to set the boundaries of acceptability so wide that everything is at least satisfactory (Simon 1967). 

Policy and direction

Policy and direction issues for particular ventures emphasise the needs to:

·         ensure that what is to be done meets the organisation's overall strategy, direction, standards and values;

·         integrate from a managerial point of view the new venture, proposal, product or service with everything else that the organisation is presently engaged on.

·         new ventures are not swamped by existing activities;

·         new ventures do not swamp existing activities;

·         organisations do not get led off down fashionable and faddish routes;

·         organisations do not get drawn into the schemes of powerful and influential individuals just because of their power and influence – whatever is driven by powerful individuals must be for the good of the organisation;

The key point of reference is that organisations stick to what they know, understand and are best at. If it does become essential to venture into the unknown, then a critical part of the commitment is to ensure that everything possible is known and understood about the new venture, location or environment, and its potential for supporting enduringly viable business, in advance of any commitment.

Priorities

There is nothing intrinsically right or wrong with either approach indicated in the above figure. The main issue at the outset is to be clear about which approach is being taken, and the opportunities and consequences of that choice.

Behaviour

How organisations and their people (collectively and individually) behave is critical to effective decision-making and implementation. A critical part of the strategy process therefore lies in knowing and understanding:

·         the collective and dominant culture, attitudes, values and ethics present;

·         the nature and influence of key dominant and powerful individuals and groups; and how they behave in relation to decisions that have to be taken

·         the key drivers of decisions, whether behavioural or business driven (and where the balance lies between behavioural and business drives).

Collective and individual confidence on the part of everyone concerned is vital; it is impossible to convince others of a particular choice if this confidence is not present.

This is seen at its worst when top, senior powerful and dominant personalities use the force of their position or influence (as well as their personality) to drive something through that they are personally committed to (they may also be committed in the name of the organisation, but this becomes subservient to their own particular ambition). In extreme cases this can and does lead to bullying and harassment, victimisation of waverers and doubters, and marginalisation of anyone with expertise who tries to bring a rationale to the particular position.

Collective confidence and mutuality of interest are key aspects in the success or otherwise of partnerships and joint ventures. Those who engage in arrangements and agreements with other organisations must satisfy themselves that they are willing and able to work together, that the specific outcomes desired by all parties are capable of achievement in the situation, and that no dominant or key interest is going to take everything at the expense of the others involved.

Assessment of behaviour alongside the rationale for the intended course or courses of action identifies the extent to which the organisation is willing, as well as capable of implementing what is proposed.

Risk

A strategic approach to risk management requires that the components of risk and uncertainty that can (and that can conceivably) affect the organisation and its environment must be studied. This is so as to ensure that anyone in a top, senior or executive position understands the full range of issues that could conceivably arise.

The main factors to attend to are as follows.

·         Assessment of sectoral trends: whether the sector is growing or declining.

·         Knowledge and understanding of substitute and alternative products and services.

·         Evaluation of outcomes of particular ventures, including: identifying the best, medium and worst possible outcomes; and analysing and evaluating any actual or potential critical obstacles and incidents.

·         Evaluating the capability to extricate oneself from the particular situation is required.

·         Assessment and evaluation of the actual attitudes of staff to what is proposed; recognising the potential consequences of failure on supply or distribution sides.

·         Scanning the macro environment for changes in regulation, transport and energy costs that could, or could conceivably, affect the overall competitive position.

Effective risk management has a range of early warning systems at its core. These early warning systems require:

·         regular scouring and scanning of the environment as above;

·         recognising signs of dissatisfaction among staff, customers, clients, suppliers and backers as early as possible;

·         recognising early indications of organisational costs beginning to rise;

·         recognising the effects, propensity and potential for technological glitches, and their effects on performance.

A behavioural approach to risk requires that each of these points is attended to and evaluated. It is not enough to have in place risk management and assessment policies and strategies: the active attention to and management of risk is an essential part of managerial expertise, and a key priority in all effective decision making.

The key behavioural issues in risk management are essentially human rather than organisational, as follows:

·         if people do not have to do something they will avoid it;

·         if people do not like doing something they will avoid it;

·         if people cannot be bothered to do something they will avoid it;

·         if there is no discernible or tangible reward for doing something people will avoid it;

·         if people are given the authority to do something they will do it (as they are not then responsible for the outcomes);

·         if people know and understand that it is not their own resources or reputation that is at risk, they will do something;

·         if people are ordered by those in authority to do something they will do it.

The strategy/behaviour/risk mix

The implementation of organisational and business decisions that arise from determining a corporate strategy is founded on the basis of all of the complexities that organisational behaviour and approaches to risk produce. The key issues therefore become:

·         what the organisation collectively and individuals want to do;

·         the nature and position of key figures driving, restraining and vetoing particular courses of action;

·         the extent to which risk is analysed and evaluated; and how these analyses and evaluations inform decision-making processes;

·         whether or not those who have decision making authority are prepared to face the findings of risk assessments and the limitations placed as the result.

If effective strategy is to be implemented, and if effective and enduringly viable decisions are to be taken, then the gaps in knowledge and the sources of influence have to be fully assessed. In particular, it is a key part of effective professional management development, that the balance between expertise and position, rank and authority is known and understood as the catalyst for decision making.

Decision-making

Decision-making is both progression and also process. Decision-making is based on a combination of:

the clarity with which issues and initiatives are defined;

·         the determination of the processes and progressions to be used;

·         the length of time that is available for the decision to be taken;

·         the availability of information, and especially the availability of information within time constraints;

Purpose: to draw the distinction between the two elements of progress and process.  The former is a schematic approach; the latter is that from which the former arises, and which refines it into its final format.  Effective and successful decision-making requires the confidence that is generated by continued operation of the process.

Into this is then added the human and behavioural influence: in simple terms, what do those who have to take the decisions want to do?

Behavioural pressures and influences on critical decisions

Organisations have series and patterns of decisions that are unique to them at all times (Andrews 1971). However, there are classes of decisions that are common across all organisations, meaning that at some point everyone is faced with more or less universal issues that have to be addressed as follows:

• whether to buy and own technology and equipment or to lease it;
• whether to outsource particular activities or retain them in-house;

·         whether to enter into new ventures on the basis of return on investment, or to enter on the basis of collective and individual vanity, prestige and triumph;

·         whether or not to buy up critical resources, and the organisations and sources that presently own them;

·         whether or not to become involved in merger, acquisition and takeover activities;

]]> whether or not to enter into new markets, locations and activities;

·         establishing the rationale for entering into partnerships and joint ventures;

·         whether or not to take decisions on the basis of damage and limitation to competitors, rather than for direct organisational advantage;

·         determining the rationale for developing new products, services and ventures.

At the points at which each proposal is considered on an individual basis, there will be data that supports the idea, and risks and contextual factors that have also to be considered. A critical matrix may then form from this as follows.