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INVESTMENT DECISION MAKING AND ENVIRONMENTAL SCANNING

INVESTMENT DECISION MAKING AND ENVIRONMENTAL SCANNING

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Published by fairus
Environmental scanning is the first step in the chain of activities leading to environment
adaptation. Many researchers noted that environmental changes were making environmental scanning
increasingly important for management to foresee and understand those changes and conceived as a key
step in the process of organizational adaptation. Knowledge from the information helps the top
managements to plan for the company’s future course of action. An argument has been advanced that
environmental scanning is a critical process – a process that takes place before decision is made. Thus, any
empirical findings regarding the impact of scanning have on decision and subsequent outcomes may have
implications for theoreticians and practitioners alike. This paper reports on a study undertaken to determine
the types and method of information scanned by Malaysian decision makers in making capital investment
decisions. Data obtained from a convenient sample of 118 useable responses and factor analysis in general,
found that the information being scanned was only technology, economic and competition information.
Only economic and competition information scanned lead to the quality of investment decision. Formal
method was used only to scan competition information. Overall results of this study suggest that, to a great
extent, it can be concluded that, Malaysian executives did not consider scanning as an integral component
to achieve high quality decisions.
Environmental scanning is the first step in the chain of activities leading to environment
adaptation. Many researchers noted that environmental changes were making environmental scanning
increasingly important for management to foresee and understand those changes and conceived as a key
step in the process of organizational adaptation. Knowledge from the information helps the top
managements to plan for the company’s future course of action. An argument has been advanced that
environmental scanning is a critical process – a process that takes place before decision is made. Thus, any
empirical findings regarding the impact of scanning have on decision and subsequent outcomes may have
implications for theoreticians and practitioners alike. This paper reports on a study undertaken to determine
the types and method of information scanned by Malaysian decision makers in making capital investment
decisions. Data obtained from a convenient sample of 118 useable responses and factor analysis in general,
found that the information being scanned was only technology, economic and competition information.
Only economic and competition information scanned lead to the quality of investment decision. Formal
method was used only to scan competition information. Overall results of this study suggest that, to a great
extent, it can be concluded that, Malaysian executives did not consider scanning as an integral component
to achieve high quality decisions.

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Published by: fairus on Oct 31, 2009
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IVESTMET DECISIO MAKIG ADEVIROMETAL SCAIG
 Nik Maheran Nik Muhammad
1
Fadilah Yahya
2
 
1
Faculty of Business Managment, UiTM Kelantan,
2
Language Academy, UiTM Kelantannmaheran@kelantan.uitm.edu.my ABSTRACTEnvironmental scanning is the first step in the chain of activities leading to environmentadaptation. Many researchers noted that environmental changes were making environmental scanningincreasingly important for management to foresee and understand those changes and conceived as a keystep in the process of organizational adaptation. Knowledge from the information helps the topmanagements to plan for the company’s future course of action. An argument has been advanced thatenvironmental scanning is a critical process – a process that takes place before decision is made. Thus, anyempirical findings regarding the impact of scanning have on decision and subsequent outcomes may haveimplications for theoreticians and practitioners alike. This paper reports on a study undertaken to determinethe types and method of information scanned by Malaysian decision makers in making capital investmentdecisions. Data obtained from a convenient sample of 118 useable responses and factor analysis in general,found that the information being scanned was only technology, economic and competition information.Only economic and competition information scanned lead to the quality of investment decision. Formalmethod was used only to scan competition information. Overall results of this study suggest that, to a greatextent, it can be concluded that, Malaysian executives did not consider scanning as an integral componentto achieve high quality decisions.Keywords: Environmental Scanning, Task Information, General Information, Decision quality
1.
 
ITRODUCTIO
Companies invest hundreds of billions of dollars every year in fixed assets. By their nature, theseinvestment decisions have the potential to affect a firm’s fortunes over several years. A gooddecision can boost earnings sharply and dramatically increase the value of the firm and a baddecision can lead to bankruptcy. The reason is that, most of these decisions involved committinga big sum of money and the results heavily depend on forecasting and creating the future in acompetitive and ever-changing business environment. Thus the risk and uncertainty is inherent inthese investments. Hence, coping with uncertainty is a central issue whenever organizationsadapt to environmental changes.Information becomes a valuable input in decision-making as the potential increase inuncertainty may leads into more information seeking, and consequently may impact anorganizational decision-making. The needs and values of environmental information have also been emphasized in corporate long-range planning because this information assists topmanagement to effectively plan for future action (Fahey and King, 1977). To reduce uncertainty,scanning was done to identify key trends, changes and events in an organization’s environment,which may affect an organization’s functions and goals (Aguilar, 1967; Hambrick, 1981; Miliken,1990).Boyd and Fulk (1996) mentioned that scanning might well provide useful information for decision-making in response to perceived variability. The scanning literature has identifiedseveral sectors that need to be monitored: economics, technological, governmental, social,competitors and customer (e.g. Jain, 1984). It has been indicated that these areas create differentlevels of strategic uncertainty for executives. An increase in strategic uncertainty inevitably means both the general environment and task environment must be scanned (Daft et al., 1988).
 
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 Task environment includes sectors which are in direct interaction with an organization (e.g.suppliers, customers, and competitors). Task environment is the most proximate environment of the firm, and is composed of elements that have direct influence on the organization, and in turnare influenced by the activities of the firm (Dill, 1958 cited in Sawyerr, Ebrahimi andThibodeaux, 2000). General environment on the other hand include sectors which is define asremote environment and having indirect interactions with an organization (such as thegovernment, economic conditions, and socio-cultural factors) (Ebrahimi, 2000; Grant, 1991)Environmental scanning researches in US, Canadian, and Nigerian firms provided somesupport for the importance of sectors in the task environment (e.g. Aguilar, 1967; Auster andChoo, 1994; Daft et al., 1988; Elenkov, 1997; Ebrahimi, 2000; Smeltzer, Fann and Nikolaisen,1988). On the other hand, Sawyer et al. (2000), studies on scanning practices of US-basedmultinational firms and of firms operating in developing countries have found that sectors of theremote environment received greatest attention from decision makers. O’connell andZimmerman (1979) found that the economic sector was the most important sector. Kobrin,Basek, Blank, and La Palombara (1980) found that the political sector created the greatest level of  perceived uncertainty in their studies of US-multinational firms. Studies (e.g. Sawyer, 1993 andElenkov, 1997) on environmental scanning practices of managers in developing countries, foundthat remote environment such as economic and political/legal sectors were of the greatestimportance.However, many studies also found that task and general environments do not differ significantly in terms of perceived strategic uncertainty (e.g. Auster and Choo, 1993; Elenkov,1997; Sawyerr’s, 1993). Daft et al. (1988) provided partial support for the importance of the task environment sectors to decision makers. May et al. (2000) in their study on perceivedenvironmental uncertainty among Russian managers also found a mixed pattern of the importanceof task and general environment. Therefore, due to this mix finding, the present study was tryingto investigate the behavior of Malaysian decision maker in scanning the information in relation tothe quality of the decision made.
2.
 
MOTIVATIO OF THE STUDY
The study on environmental scanning is well recognized in strategic management and decisionmaking literature. However whether its impact to investment decision making quality is not wellresearched. The literature has generally agreed that environmental scanning has significant positive impact on the performance of an organization, as attested to by several studies such asDaft and Weick, (1984); Hambrick, (1981); Venkatraman (1989); and Dess, and Davis (1984).However, many of these studies have focused on decisions related to the choice of corporatestrategies, and there is certainly a dearth of literature that focused on strategic investmentdecisions, which is the primary focus of this study. Thus the findings of this study will further add to the literature with in-depth understanding of scanning and its differential impact on qualityof decision. The inclusion of the moderating variables (Information Processing Capacity; IPC)will further enhance the understanding of the differential impact of scanning under variouscontexts of the decision-making situation.The general objective of this research therefore is to determine the impact of environmental scanning and its contribution to the investment decision quality. It also attempts to address the issues of what information should be scan to ensure quality decisions and does IPC iscontingent upon environmental scanning and investment decision-making quality.
3.
 
RESEARCH MODEL3.1 Information processing theory decision making perspective
The conceptual underpinning of the present study was Information Processing theory, which wasoriginally initiated, by Thompson (1980), Simon (1957) and March and Olsen (1976). Starting
 
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from this theoretical foundation, Duncan (1972), Galbraith (1973), Ouchi (1980); Tushman and Nadler (1976); Williamson (1981); and (Bums and Stalker, 1961; Lawrence and Lorsch, 1967;Duncan, 1972; Van de Ven, Delbecq and Koening, 1976; Egelhoff, 1982; Kmetz 1984 as cited byEgelhoff, 1991) developed organizational information processing framework in terms of 
decisionmaking perspective
. They proposed that organizational models of information processing shouldfocused on environmental uncertainty and how an organization absorbs uncertainty as theimportant contingency concept to gain desired level of information processing capacity.The decision making perspective analyzes organizations as rational decision makingsystems. However, since the individual as decision maker is bounded by cognitive limitations(Simon, 1957) information is processed in order to reduce or avoid uncertainty. Therefore, theorganization sets its goals first, then searches for alternatives, and selects courses of action whichlead to goal attainment (Choo, 1991)According to Galbraith (1973), all organizations must face uncertainty – uncertaintyabout the market, suppliers, shareholders, government agencies, and so on. Uncertainty arises because the executives experience lack of information about an external environment that iscomplex and variable (Choo, 2001). Building on the work of Simon (1957), Galbraith (1973) proposes the theory that an organization processes information in order to reduce task uncertainty.That is the difference between the amount of information required to perform the task and theamount of information already possessed by the organization. Thus, according to Galbraith thereis a relationship between the amount of uncertainty faced by an organization and the amount of information processing that must go on in an organization. The capabilities of the organizational participant to process information to reduce uncertainty will lead to organization effectiveness.Organization effectiveness according to him is those that fit their information processingcapacities (for gathering, transforming, storing, and communication information) to the amount of uncertainty they face (Egelhoff, 1991) and the quality of decision they made. Thereforeinformation processing theory involves the collection of data and transforms data into morevaluable information that relates to particular decision or function in the organization.Information processing theory had been viewed from many perspectives such as; (1) cognitiveview (skill, knowledge and experience); and (2) logical view (decision support system).
 Figure.1:
Information Processing and Contingency Concept.
4.
 
METHODOLOGY4.1
 
Sample and Procedure
Data for this study was collected through survey-structured questionnaires. The questionnaireswere distributed to higher level decision makers who make capital investment decision inMalaysian company of various sectors. A total of 118 responses were obtained from 320questionnaires sent. The samples were gathered through convenient sampling method.
Environmentalscanning
Decision QualityInformation processing capacity

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