STRATEGIC INVESTMENT DECISION-MAKING: COMPLEXITIES, POLITICS AND PROCESSES*

This article is a preliminary report on an investigation into the processes of investment decision-making. Three case studies from three firms are presented which show disparities in a number of aspects of process, for example, the length of time taken to arrive at a decision, the number and intensity of disagreements and uncertainties encountered. Data were collected for these cases through semi-structured interviewing from multiple informants in the three organizations, thereby permitting the use of analysis of variance techniques of the different perspectives given by informants. Perceptions of the effectiveness of the decisions were also gathered. One finding from the study is that the decisions with the lowest perceived effectiveness (in firm HE) also lost support from those involved in making the decision during the process, although the decision was eventually implemented. This decision also had the least agreement amongst informants as to the main sources of disagreements. Informants of all three decisions saw effect upon product quality and productivity, fit with business strategy and competitive position of the company as the most important factors to take into account in evaluating the decisions. In firm CG, however, there were disagreements as to how the investment should be evaluated. In the conclusions to the article a disucssion is given as to the nature of evaluation procedures in relation to the developing theory of information systems.     

Learning by a dominant firm

This paper is concerned with the optimal output decisions of a dominant firm in the presence of imperfect information about the rival's reactions. The model is multi-period with the profits in each period being independent of those in other periods. Consequently, if the rival's reaction parameter were known to the dominant firm, a myopic policy would be optimal, In the presence of imperfect information about the rival's unknown reaction parameter, the dominant firm acts in a Bayesian manner by updating its prior distribution based on the observations of the rival's outputs. Because of the multiplicative shape of the rival's reaction function, the Bayesian updating rule is a function of the dominant firm's decision variable, i.e. its output decisions. This creates a dependence of the future value of the dominant firm on the present output decision, and hence a myopic policy is not, in general, optimal. It is shown that through output experimentation the dominant firm will tend to overproduce and, consequently, will increase its expected discounted profits (market value).     

ECONOMIC ANALYSIS AND MANAGEMENT STRATEGY: A SURVEY

The survey classifies economic theories of the firm into four categories based on the level of aggregation in economic models: (1) neoclassical, (2) industrial organization, (3) contractual, and (4) organizational incentive. Economic theories of the firm are evaluated on the basis of their potential application to problems of management decision making. The survey suggests that a management perspective can be useful in developing an integrated theoretical analysis of the firm that addresses both competitive strategy and organizational design.     

Dominant CEO,Deviant Strategy,and Extreme Performance: The Moderating Role of a Powerful Board

This study examines the effect of dominant CEOs – defined as CEOs who are very powerful relative to other executives in their top management teams – on firm strategy and performance. Based on a sample of 51 publicly traded, single‐business firms from the US computer industry for the period 1997–2003, our results suggest that firms with dominant CEOs tend to have a strategy deviant from the industry central tendency and thus extreme performance – either big wins or big losses. Further, powerful boards weaken the tendency of dominant CEOs towards extremeness and, more important, improve the likelihood of dominant CEOs having big wins versus big losses. This study reconciles the pessimistic and heroic views regarding dominant CEOs, and suggests that the notion of power balance should be considered in a broader context.     

Architecting Brands

ABSTRACT

Brand architecture may be understood in reference to an integrated approach of a firm directed towards the design and management of its brand portfolio. Broadly, brand architecture is concerned with the pedigree of brands of a firm, role of specific brands and the relationship between sub-brands. In particular, brand architecture may be considered as the way a company organizes, manages, and markets their brands. Different business strategies require different brand architectures. The paper discusses the relevance of hierarchy of brands, and the role of brand audit to manage the brand portfolio of a firm. The discussion in the paper also delineates the steps involved in architecting a brand in a firm from the managerial perspective.     

Wholesale price discrimination: Innovation incentives and upstream competition

In intermediate good markets where there are alternative supply sources, wholesale price discrimination may enhance innovation incentives downstream. We consider a vertical chain where a dominant firm and a competitive fringe supply imperfect substitutes to duopoly retailers which carry both varieties. We show that a ban on price discrimination by the dominant supplier makes uniform pricing credible and reduces retailers’ incentives to decrease the cost of acquiring the competitively supplied variety, leading to higher upstream profits and lower downstream welfare. Our analysis complements existing results by identifying a novel channel through which wholesale price discrimination can improve dynamic market efficiency.     

Delivery lags and buffer stocks in the theory of investment by the firm

This paper contains a dynamic model of a firm holding a stock of unfilled orders for output while facing a fixed delivery lag attached to acquiring new capital goods. The model leads to a two-stage optimal control problem where the initial time interval corresponds to the Marshallian short-run and the second interval is the period during which deliveries of capital goods may arrive. Optimality criteria are provided for both time intervals and the behavior of the firm is characterized along both adjustment paths. The short-run decisions of the firm are shown to be tied to long-run decisions planned by the firm.     

Power in Profit-Maximizing Organizations

I study how profit-maximizing organizations make decisions. Members of organizations tend to have incompatible preferences over decisions, but willingness to pay for decisions plays a very limited role in actual decision making. A sizable empirical literature documents that people who provide critical services, are hard to replace, or deal effectively with external shocks are powerful; they have disproportionate influence over decisions. This can be profit maximizing because the right to shape the firm through its decisions renders the firm more attractive as an employer. Thus, the relative costliness of employees' departures should affect their relative power.     

Economic theory and exchange rate forecasts

Businesses use forecasts of exchange rates to make decisions about production, employment, investment, financial management, and pricing decisions. The proper statistical criteria for making and evaluating these exchange rate forecasts are implied by the underlying decision problem. That decision problem is in turn affected by the economic environment facing the firm and its industry, the overall macroeconomic situation, and the main types of disturbances affecting exchange rates. In general, the proper loss function for the forecasting problem will be asymmetric.     

The Multiple Boundaries of the Firm*

ABSTRACT The notion of firm boundaries has received considerable attention in theories of the firm that address the problems of investment incentives and mitigation of hold‐up problems. In this paper we attempt to develop a different approach to the problem of vertical firm boundaries, based on recent advances in the capabilities view of the firm. Our arguments rely on the pioneering insights of Penrose, Richardson and Loasby to elaborate a view of the boundaries determined by the interaction of the firm's direct and indirect capabilities with other actors. We develop the notion of indirect capabilities to highlight how firm boundaries respond to the distribution of capabilities in the economy as well as the modes of access to complementary and external capabilities. We conclude that the evolution of firm boundaries must be understood in the context of decisions on how the firm relates to other actors in its environment.     

Experimental Study of Firm Bounded Rationality and the Pattern of Trade

This paper describes an experiment and simulation with features of a spatially explicit trading environment. Decision makers repeatedly make decisions about firm headquarters, input demands, and export patterns. A goal of this research is to determine if subjects’ management decisions reflect profit maximization, learning, or heuristic decision making. It also considers what impact decision makers’ bounded rationality has on the aggregate pattern of trade. Results indicate that bounded rationality in the form of learning and heuristic decision making are ubiquitous features of subjects’ decisions. This manifests as under‐reaction to trade‐driver stimuli and produces Trefler's missing trade, suggesting a behavioral basis for this anomaly.     

企业集团的适度规模经济与聚集经济研究——一个基于国际垂直分工视野的分析框架

基于国际垂直分工的理论视野,界定了单体企业的适度规模经济和企业集团总体的最适规模经济等概念范畴的内涵与外延,并结合垂直范围经济和聚集经济等相关概念,从技术经济角度给出了企业集团适度规模经济的模型框架和测度方法,揭示了企业集团在地域上的合理规模即集聚程度与集聚效益之间的倒U字形钟形关系。利用该分析框架,提出了在国际垂直分工视野下,生物医药和专用设备制造等重点行业实现企业集团适度规模经济战略选择的关键在于利用企业集团的集聚经济优势和范围经济优势,并通过产品细分的差别化定位,实现大型企业集团对中小企业集群的策略性替代。     

A Capabilities Perspective on the Evolution of Firm Boundaries: A Comparative Case Example from the Portuguese Moulds Industry*

ABSTRACT The issue of vertical firm boundaries continues to attract interest both for economics and management research. The transaction cost economics approach, emphasizing transaction‐specific assets and opportunism in order to explain discrete ‘make‐or‐buy’ decisions, dominates the literature. Nevertheless, alternative perspectives, developed under the guise of the capabilities, competence or knowledge‐based theories of the firm, have gained attention recently. They focus on the evolutionary dynamics of boundaries in the context of the division of labour among firms in an industry and on what is to be divided and co‐ordinated – i.e. productive knowledge. The conceptual links between this line of research, which some refer to as neo‐Marshallian, and the Industrial Networks approach are explored in this paper. The paper emphasizes both a vision of firms as sets of direct and indirect capabilities, developed and combined in different ways over time, and the connectedness between inter‐firm relationships. The discussion is illustrated with the cases of two firms, which are contrasted in terms of the dynamic evolution of their boundaries. The analysis made supports the argument that firms’ vertical boundaries reflect their relationships with specific counterparts and the way they address through time the division and integration of knowledge through the configuration of direct and indirect, counterpart specific, capabilities.     

An impulse-control method for investment decisions in dynamic technology

This paper presents a new framework to augment standard methods in evaluating profitability of investments, especially those involved in dynamic technology. In this case there is a possibility that although a certain investment is profitable using standard methods, it should not be undertaken because it precludes a more profitable investment later on, when more advanced equipment will be available. The investment decision faced by a firm is presented here as an impulse-control problem, where the process of technological progress is modelled explicitly. The outcome of the optimization yields, in addition to investment expenditures, the expected time period between consecutive investments. A simple example demonstrates the use of the technique in actual investment decisions.     

The dynamic adjustment of environment, strategy, structure, and resources on firm performance

Under the uncertainty of external environment, how do the firms exploit resources, adjust organizational structures, and adopted proper strategies to gain the better performance is an important issue. Many theories have been proposed to explain this phenomenon. Structure-conduct-performance model suggest that industry structure influences the firm behavior and determines the performance of individual firms and of the industry as a whole. Strategy-structure-performance model suggest that strategy must dictate organizational structure, which in turn influences performance. The environmental perspective considers external environments. Resource-Based View suggests that management must focus on the values of resources to generate sustained competitive advantages and to improve performance. Dynamic adjustment among environment, strategy, structure, and resources can become primary causes of the firm performance. The purpose of this paper is to clarify the gaps between different theories and to complement the existing theories. This paper confirmed the measurement of the constructs first and competing models were used to examine dynamic adjustment among constructs and the relationships to firm performance. The results demonstrated that most of the relationships among constructs were supported and support the dynamic adjustment of the constructs. When facing uncertain environments, firms tend to use competition strategies as well as cooperation strategies; firms tend to formalize organizational structures and to amass resources. Firms which conduct cooperation strategies and possess more resources will attain better performance levels than those that do not. As to the theoretical models, the structure-conduct-performance model and the environmental perspective were supported. Practitioners should recognize the importance of the industrial and environmental factors.     

Optimal production and portfolio investment decisions

This paper takes a further step towards the integration of the theories of production and finance under uncertainty. It sets up a continuous time-diffusion process model of production by firms and portfolio investment by individuals and provides a simultaneous solution to these two decisions. The derived equilibrium conditions, being in the stockholders' interest, are specific in form, and are determined by two factors: attitudes of investors towards risk and the systematic risks of the firm.     

Choosing strategic responses to address emerging environmental regulations: size,perceived influence and uncertainty

How companies respond to impending regulations is a significant aspect of corporate strategy. Regulations, especially environmental regulations, are expanding quickly and increasingly important to firm success. The threat of impending environmental regulation forces companies to choose levels of strategic responses on a continuum from passive to active. Using practitioner oriented research and existing theoretical models of corporate response, this study finds that the type of strategic response is negatively related to size, positively related to state uncertainty and negatively related to effect/response uncertainty. Based on existing literature and the results of this study, the paper suggests that simplifying the uncertainty construct could lead to more definitive findings in future research. The study results also suggest that a curvilinear relationship may exist between managerial perception of influence and level of strategic response. Most importantly, the findings could have a significant impact on firm decision making regarding environmental investments. For example, it is hoped that firms will be able to use the findings of this study to further understand and anticipate their competitors' decisions. Practitioners may also benefit from the conclusions on uncertainty in that they may be able to more cleanly parse the types of uncertainty immersed in impending environmental regulations. Finally, firms may be better able to understand decisions by their own managers and their competitors' managers in terms of their perceived influence over the regulatory process. Copyright © 2007 John Wiley & Sons, Ltd and ERP Environment.     

Safeguarding public accountability in horizontal government

Abstract

The trend towards horizontalization in government prompts a debate on safeguarding public accountability. This article contributes to the debate by presenting categories of horizontalization in government, types of horizontal accountability and criteria for judging the appropriateness of arrangements for public accountability. Accountability arrangements must meet the requirements of the democratic constitutional state to provide adequate checks and balances. This implies, among other things, that responsibilities must be clear and the information supply, debate and sanctioning options must all be established. A discussion of existing mechanisms for horizontal accountability indicates that the requirements of a democratic constitutional state are generally not sufficiently met. This makes it imperative to establish more balanced arrangements for public accountability that fit more horizontal forms of government.     

Breadth-of-impact frontier: How firm-level decisions and selection environment dynamics generate boundary-spanning inventions

In this paper, we provide an ex-ante explanation for why some technologies such as James Watt’s steam engine move successfully across broad technological fields, while other technologies do not. Using a sample of VC-backed biotechnology firms, we examine firm knowledge exploration choices along three dimensions—the decision to build from technologies across broad fields, the decision to explore application domains that are new to the firm, and the decision to mix these two options at the same time. We argue that firm-level invention decisions find differing responses when received by the selection environment. We find evidence of a “breadth-of-impact frontier” for technologies, wherein the choice of whether a firm should enter into a new application domain than those of the past should be informed by the degree to which the technology is citing prior work narrowly or broadly. The findings suggest that the belief that broad sourcing diversity will always result in greater citation diversity requires some caveats. The results contribute to the understanding of not only how entrepreneurial firms evolve but also how individual firms contribute to collective progress.     

Vertical FDI versus outsourcing: The role of technology transfer costs

The effect of technology transfer cost on the choice between horizontal foreign direct investment (FDI) and licensing is well established. We explore this “make or buy” decision in the offshoring context when offshore input production involves costly technology transfer. The burden of technology transfer cost that falls on the sourcing firm depends not only on the technological complexity of the offshored input but also on the mode of organizing offshoring. Outsourcing entails low technology transmission cost but a higher distortion in input production by the arm's length supplier while vertical FDI involves a higher technology transmission cost but a lower distortion in input production by the affiliated supplier. Contrary to the existing literature, we find that, irrespective of the type of good, outsourcing is the preferred mode at higher ends of technological complexity.