Sub: Finance Topic: Invesment Decisions
Tactical and Strategic Investment Decisions
Investment decisions may be
tactical or strategic
. A tactical investment decision generally involves arelatively small amount of funds and does not constitute a major departure from what the firm hasbeen doing in the past. The consideration of a new machine tool by a motor manufacturing companyis a tactical decision, as is a buy-or-lease decision made by an oil company. Strategic investmentdecisions involve large sums of money and may also result in a major departure from what thecompany has been doing in the past.
directly affect the basic course of thecompany. Acceptance of a strategic investment will involve a significant change in
expected profits and in the risks to which these profits will be subject. These changes are likely to leadstockholders and creditors to revise their evaluation of the company. If a private corporationundertook the development of a supersonic commercial transport (costing over $20 billion), thiswould 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 onintuition rather than on detailed quantitative analysis.The investment strategy of a firm is a statement of the formal criteria it applies in searching for andevaluating investment opportunities. Strategic planning guides the search for projects by identifyingpromising product lines or geographic areas in which to search for good investment projects. One firmmay seek opportunities for rapid growth in emerging high-technology businesses; another may seekopportunities to become the low-cost producer of commodities with well-established technologiesand no unusual market problems; a third firm may look for opportunities to exploit its specialknowledge of a particular family of chemicals. A strategy should reflect both the special skill andabilities of the firm (its comparative advantage) and the opportunities that are available as a result of dynamic changes in the world economy.
leads to a choice of the “forest”—
and makes a choice between individual “trees.” The two activities should