Traditional Investment Appraisal Techniques
“Traditional Investment Appraisal Techniques Cannot Cope With the Fast
Changing Environment in Manufacturing Industry Today”
Introduction
“If you can 't measure it, you can 't manage it”. This basic principle of Peter Drucker is nowadays especially important when it comes to the valuation and management of strategic investments, which have the potential to bring sustainable change to the business processes of a company. When it comes to the process of assessing strategic investment proposals through investment appraisal techniques there might be doubts about the capability of traditional methods to recognize strategic intangible benefits which might be difficult to measure. Mainly it has been argued that the overconfidence on financial appraisal methods may lead to a predisposition against strategic investment projects, thus acting as a hurdle for business innovation (Phelan 1997, as discussed in Alkaraan and Northcott 2006, p. 150). Therefore this review aims to discuss this matter by analysing the scientific perspective on traditional techniques and new approaches. Furthermore it will analyse the development of the investment appraisal practise through recent studies about manufacturing companies in the UK, Sweden and Italy.
Shortcomings of traditional approaches
Many new investments in the manufacturing industry improve the production processes leading to higher flexibility, efficiency as well as reliability and consistent quality of products, shorter lead times, simplification of design changes and solve environmental issues (Nasarwanji et al. 2009, p. 2, Jonsson 2000, p. 1466). Other strategic benefits might be creating competitive advantage, improve organizational learning or the responding to customer needs (Kaplan 1991,
p. 215). While some of these strategic benefits can be quantified and therefore be measured others may be difficult to value or estimate in financial terms. Therefore it might be possible that such strategic benefits are not included in the
Changing Environment in Manufacturing Industry Today”
Introduction
“If you can 't measure it, you can 't manage it”. This basic principle of Peter Drucker is nowadays especially important when it comes to the valuation and management of strategic investments, which have the potential to bring sustainable change to the business processes of a company. When it comes to the process of assessing strategic investment proposals through investment appraisal techniques there might be doubts about the capability of traditional methods to recognize strategic intangible benefits which might be difficult to measure. Mainly it has been argued that the overconfidence on financial appraisal methods may lead to a predisposition against strategic investment projects, thus acting as a hurdle for business innovation (Phelan 1997, as discussed in Alkaraan and Northcott 2006, p. 150). Therefore this review aims to discuss this matter by analysing the scientific perspective on traditional techniques and new approaches. Furthermore it will analyse the development of the investment appraisal practise through recent studies about manufacturing companies in the UK, Sweden and Italy.
Shortcomings of traditional approaches
Many new investments in the manufacturing industry improve the production processes leading to higher flexibility, efficiency as well as reliability and consistent quality of products, shorter lead times, simplification of design changes and solve environmental issues (Nasarwanji et al. 2009, p. 2, Jonsson 2000, p. 1466). Other strategic benefits might be creating competitive advantage, improve organizational learning or the responding to customer needs (Kaplan 1991,
p. 215). While some of these strategic benefits can be quantified and therefore be measured others may be difficult to value or estimate in financial terms. Therefore it might be possible that such strategic benefits are not included in the
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