Accounting

To achieve corporate success, it is important that business organisations are able to discover and explore the right mix of strategy and operational effectiveness that could give them a clear comparative advantage among other competiting firms in the subsector or industry. Though they work in tandem, operational effectiveness should not be confused with strategy. World-renowned expert on strategy, Michael Porter (2001) described a firms operational  agenda as the proper place for constant change, flexibility, and relentless efforts to achieve best practice. In contrast, the strategic agenda is the right place for defining a unique position, making clear trade-offs, and tightening fit. It is evident that both sit side by side as equal partners in the game of enterprise.

Except for companies operating in blue oceans (uncontested market spaces), a trade-off between low cost and differentiation has been a prominent feature. This therefore introduces the element of competition into the market in a quest to capture a fair share of keenly contested markets and maximize profit. It is this phenomenon that makes the deployment of cutting-edge strategy, backed up in sound operational effectiveness (functions, activities, competencies) an imperative. It also makes of essence, the establishment of a clear comparative advantage.

It is a fundamental axiom of business that in order to maximize profit, costs must be kept at the minimum level possible. Firms therefore benefit from comparative advantage when they specialise in the production of goods or services at the lowest cost possible relative to competing firms in a particular industry. In recognition of this fact, we could then establish an intricate link between firms overall profitability and the efficiency of their capital investment implementation.

Capital projects are very pivotal to firms long-term viability. Accummulating capital investments that barely contribute to a firms strategic cause will only resort to operational inefficiencies and eventual underperformance. Sizable, long-term investments in tangible or intangible assets therefore have long-term (strategic) consequences on business entities.

In a study of Intel- the worlds largest micoprocessor company, Miller and OLeary (2005) revealed that  vital decisions to defer, accelerate, or modify any one investment program in the corporation is done through a mechanism known as a technology roadmap. It is the underlying strategy that governs the technical and economic investment decision-making process at Intel. Intels case is good case in point of how carefully fashioned strategy (their technology road map) is alligned with appropriate investment appraisal technique (the DCF analysis).

Intel has been able to consolidate on its success due to its improved fabrication process that allows it to synchronize product differentiation at reasonable interval and improved operational efficiencies. Establishing extensive complementarities between capital spending proposals, Intels capital budgeting process restricts the right of sub-units to evaluate individual investments independently, but necessarily in line with a technology roadmap or strategy.

One interesting fact about Intels technology roadmap is that it is not just limited to the firm, but also takes the industry into considertaion. This has led to the development of the SEMATECH roadmap, which enables options on technology development  alternatives to be pursued at an industry level. Without an industry-level process that enables firms to focus the capital spending decisions of suppliers, a firm such as Intel might be unable to realize the benefi ts of extensive complementarities among its investments.

One obvious fact in Intels business model is its operational flexibility in investment decision-making. This is a necessary prerequisites for any firm that wants to stay ahead of competition. A refusal to execute strategy in such operational flexibility that reflects eminent realities is only likely to rob an enterprise of its market share at the expense of more proactive firms.

The choice of techniques employed in appraising investment decisions could have obvious impact on the ability of firms to maximize profit and by implication compete favourably in a particular industry. It is very important that a firms capital investments are is well-alligned to its operational effectiveness and corporate strategy. Efficient capital budgeting in itself therefore makes cost-cutting easier by eliminating extraneous expenditures and foster investment focus, as the case of Intel has practically demonstrated. Though Intel makes use of the traditional DCF analysis in appraising its capital investment decisions, other techniques like the NPV and IRR have also been widely employed by firms. NPV seems to be more preferrable though, due to its ability to handle multiple discount rates, especially when more than one investment is involved with each having different dicounting rates. Nonetheless, the NPV method has been criticised of being inherently complex and requires making too many assumptions at the various levels of appraisal. The bottomline really is that whichever investment decision is to be made or appraisal technique to be employed, such must be in line and be able to complement a firms strategy and operational effectiveness.