Business finance : theory and practice

Investment appraisal and strategic planning
5.11 Investment appraisal and strategic planning
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So far, we have tended to view investment opportunities as if they are, more or less,
unconnected independent entities, which follow no particular pattern. It seems that in
practice, however, successful businesses are those that establish some framework for
the selection of projects. Without such a framework it may be difficult to identify projects
for which the business is sufficiently well placed for them to be beneficial, that is,
to have a positive NPV. Such beneficial projects can only exist where a combination of
the business’s internal strengths (for example, skills, experience, access to finance)
match the opportunities available and, probably, match them better than those of its
competitors. In areas where this match does not exist, other businesses, for which the
match does exist, are likely to have a distinct competitive advantage. This advantage
means that they are likely to be able to provide the product or service more cheaply
and/or of a better quality and/or market it more successfully.
Establishing what is the best area or areas of activity and style of approach for the
business is popularly known as strategic planning. In essence, strategic planning tries
to identify the direction in which the business needs to go, in terms of products, markets,
financing and so on, to best place it to generate profitable investment opportunities.
In practice, strategic plans seem to have a time span of around five years and
generally tend to ask the question: where do we want our business to be in five years’
time and how can we get there?
Strategic planning is typically seen to follow a series of steps, which are set out diagrammatically
in Figure 5.2.
Figure 5.2
The strategic
planning framework
To position itself so that it can play to its strengths and avoid exposing itself to its
weaknesses, a business should take steps to draw up and implement strategic plans. By
doing so it stands the best chance of being able to identify investment opportunities that
can yield positive NPVs.
Establish mission and objectives
The mission is a broad statement of the business’s general direction and aspirations.
It tends to identify what the business is trying to do, in the broadest terms, usually
identifying the commercial activities that the business wants to be involved in.
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