(i) Critical Assessment of Investment-Appraisal Process
The investment appraisal process at Fabrication International (FI) is divided into four distinct steps. This appraisal process reflects the values and concerns of top management that it seeks to realize during the decision making process. FI is marked by traditional expectations of doing business. It expects its long time customers to continue doing business with it irrespective of economic realities. This mindset has prevented the company from modernizing itself. Recently, the company decided to introduce a computerized welding system to bring in latest technology to its manufacturing processes. The investment decision also went through the same appraisal process that was used for the smaller scale projects the company had been dealing in up until the present.
In the first step of the investment appraisal process, the departmental heads are asked to draw up a wish list of all the investments they would like to make for their department during the year. They are not expected to provide any more financial scope other than a ball park figure. What they are asked to do is to provide a justification for the project in line with the strategic goals and objectives of the company.
This first step of the investment appraisal process seems fairly innocuous because it allows the departmental heads the freedom to think about innovation and technology upgradation at the company. The departmental heads may use their own intuition and the feedback of their subordinates to identify key areas for investment in the coming year. The appraisal process also seems to encourage free thinking because it encourages departmental heads to come up with investment projects without feeling bogged down with too much financial analysis. The responsibility to provide at least a ball park figure helps to keep the departmental heads within the bounds of reality and prevents them from getting carried away by the excitement. A third advantage of this stage is that it encourages departmental heads to develop a strategic perspective of activities within their control and their role in the organization. Making a strategic justification mandatory at the very beginning of the investment appraisal process makes certain that all departmental heads are thinking along strategic lines and about projects that can help the organization attain its strategic objectives. It also enables departmental heads to consider the existing strengths and weaknesses of the company before bringing up a list of investment proposals for the top management to consider.
In terms of choice management-change management, the requirements of this stage encourage departmental heads to exercise the choice process stage identified by Burnes (1998). They get the opportunity to analyze the context, history and past of the company before deciding on the trajectory or the means of getting to the future (Simms, 2005). In other words, the choice management-change management model assumes that managers are not condemned to their planned strategy or to the environmental forces, but have the opportunity to exercise choice (Eckermann, Lin & Nagalingam, 2003). According to Burnes (1998), the choice and trajectory stages act independently of one another as well as in continuation of each other, hence it is stated here that the exercise of the choice process helps to set the stage for the trajectory process as a subsequent step in the change management process. The first step also encourages managers to exercise managerial choice. The freedom afforded to them at this stage is sufficient opportunity for them to think of ways in which they might want to align the organization to the environment as well as influencing environmental factors to suit organizational interests.
Along with these advantages, the first step also leaves room open for some negative aspects. The relative freedom and wide field given to the departmental heads by the top management leaves open some room for this freedom to be misused. Since departmental heads know that their ideas will not be accepted immediately but will be subjected to further screening and evaluation, they may be tempted to exercise a lack of judgment in evaluating which projects should be included in the wish list. As a result, a lot of irrelevant projects may also be included in the list along with the relevant ones. In addition to including irrelevant and unnecessary projects, departmental heads may also unethically inflate the expected funding required for the project since only an estimate of the investment amount is required at this stage. Finally, the departmental heads may be motivated by inter-departmental rivalries and may compete with one another by including exorbitant projects that may have little more than prestige value for the organization. The overall effect of all these disadvantages is that the board of directors are encumbered with appraising too many projects, which may negatively affect the quality of their decision making.
The second stage of the appraisal process brings together each departmental head with a member of the board of directors. The appraisal process makes certain that the board director is a dispassionate member with regard to the interests of the departmental head. The two go through a rigorous process of discussion on each item on the wish list to screen all the items. Ultimately, by the end of this stage, the wish list has been whittled down to just five items from the original list prepared by the departmental head.
This stage also has a few advantages. Firstly, the involvement of a dispassionate board member serves two important functions. It conveys the interest of the senior management in the plans of the middle managers. This enables better communication and sharing of ideas between the two important management layers. The second aspect of this is that it brings in neutrality to the discussion so that although the board member is in a position of authority, he or she is also well-distanced from the scope of authority and interest of the departmental head that he is able to take an objective and impartial view of the matter. Therefore, this helps to avoid a conflict of interest between the departmental head and the director because they do not get the opportunity to collude or seek mutual favors from one another.
This stage allows the departmental heads to develop their sense of long-term vision through engaging in discussions with a senior strategic level manager (Simms, 2005). They are able to develop both a sense of vision and a sense of strategy to guide their change management initiatives. Whereas the first stage encourages an exploration of ideas, the second stage encourages managers to develop a realistic vision of the future and determine the strategic value of their investment proposals.
During the third stage of the appraisal process, the projects that have been narrowed down are formulated in terms of a complete financial case specifying the scope of the project, scale of investment, source and use of funds along with other measures such as net present value and payback period. The effects on the competitiveness of the organization are also discussed. This stage encourages the development of change objectives and planning as the departmental heads construct their investment proposals in practicable and quantitative terms. Managers get to identify loopholes in their proposals and identify remedial measures. This helps them to exercise managerial choice and the realignment of their plans with environmental realities.
In the fourth stage, the board of directors meets for two days where they discuss each of the shortlisted projects and evaluate their suitability against certain criteria. The projects need to fall within the maximum investment budget the board has determined for the year. Secondly, the board of directors will only accept projects that can assure a payback return period of two to three years. Projects where the company will be able to recover its investment over a period extending beyond three years are rejected. Finally, one project from each department has to be approved.
While this stage offers all the advantages and disadvantages associated with open discussion at the top management level, certain structural flaws in the criteria for assessment are so fundamental that their negative effects outweigh most of the advantages the appraisal process can promise. For instance, the reduction of the wish list to five items for each department seems redundant when the board has already set a budget for the investment projects for the year. This means that after all the projects have been selected, there may still be funds available for investment in other projects, which is a source of inefficiency. Secondly, the appraisal process centers exclusively on the project cost. Although a strategic orientation is emphasized in the first stage of the appraisal process, the discussion with the departmental head and among the board members is based on the cost savings aspect alone, as evidenced in the case of the CWS project. Thirdly, the board's fixation with a two to three-year payback period reflects short-termism whereas given the company's current competitive position; the opposite approach should be adopted. To implement innovation and to stay competitive over the long-term, the…