The Effect of Firm Size on the Interrelationship between Capital Techniques and Strategic Planning Tools: An Exploratory Study

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ABSTRACT

The present study attempts to explore empirically the effect of size on the interrelationship between capital budgeting techniques and strategic planning tools, in both dominant and rapidly growing U.S. based corporations. Samples are drawn from two distinct populations: the Fortune 500 and the INC 500. A mail survey was utilized to collect data on the adoption of capital budgeting and strategic planning tools. The findings suggest that there is currently a high level of coordination between the adoption of strategic planning methods and capital budgeting techniques, and that large firms typically utilize more than one technique during the strategic planning process. The major conclusion that can be drawn from the present study is that adoptors of discounted cash flow capital budgeting techniques also tend to adopt the more sophisticated environmental analyses and portfolio models strategic planning tools, regardless of firm size.

INTRODUCTION

The current American cultural and economic crisis, with its associated trade deficits, unemployment lines, increasing numbers of homeless (Hill & Stamey, 1990), and ever-lowering standards of living, has as a possible antecedent the inability of dominant U.S. corporations to fully consider the long run strategic implications of their financial decisions. Wensley (1981) suggests that the conscious integration or financial and marketing strategic planning tools is essential for optimal long-term resource allocations. Each capital investment decision that a firm makes ultimately affects its future strategic posture.

A plausible explanation for the decline of American economic international competitiveness is the shorter term focus of domestic private and institutional investors and, hence, corporate boards of directors that has come about concurrently with the emergence of modern financial theory as the dominant, and often exclusive, decision making criterion (Reich, 1983). U. S. competitive performance is in sharp contrast to that of Japanese based corporations which have tended to have great appreciation for the long-term strategic implications of their decisions (Reich, 1983; Anderson, 1991). The historic willingness of the Japanese to undertake projects with very distant payoffs (Gemmell, 1991) may be due to some extent to the underlying cultural and economic functions of keiretsus.

Keiretsus are institutions centered around large Japanese conglomerates exhibiting feudallike control over a highly coordinated vertical intra-organizational system of firms (Sakai, 1990). The keiretsus consist of a design, manufacturing, financing, and marketing system composed of thousands of smaller subcontractors, with interlocking ownership and management with banks and other marketers in a wide variety of industries and markets (Sakai, 1990). Finance researchers suggest that the conglomerates dominating the keiretsus may enjoy a lower cost of capital due to captive financial institutions and internal funding (Anderson, 1991; Frankel, 1991; Katz, 1991), and hence are typically more future oriented than their U S. competitors. As an example of the long-run strategic horizon of Japan's powerful keiretsus, Matsushita Electric Industrial Company, the parent of Panasonic, Quasar, National, and Technics brands, is alleged to have a 250-year strategic planning horizon, forcing the explicit consideration of the effect of current decisions on the corporation's long-term strategic posture (Frontline Series, 1992).

A currently significant example of the need for an explicit interrelationship between financial decision making and strategic planning can be found in an analysis of the detrimental effects on U.S. industrial competitiveness due to outsourcing (Bettis, Bradley & Hamel, 1992). Bettis, Bradley, and Hamel (1992) found that as U.S. boards felt increasing pressure from shareholders to improve financial performance, they typically would consider both cost reduction or revenue enhancing strategies. …