Project Planning

Project Planning

Project Planning

Introduction

Capital projects are often complex and offer not only financial benefits but also benefits of a strategic nature. Such strategic benefits are, in some cases, difficult to quantify in financial terms and, as a result, are invariably left out of the project evaluation altogether. Projects that have a negative NPV, but have strategic benefits are, in some cases, being accepted on faith and intuition alone. A review of some strategic models used by practitioners' highlights a need for a new pragmatic approach to the identification and evaluation of strategic benefits arising from capital investments - linking project strategic benefits with business strategy. The strategic index (SI), which is a sub-model of the financial appraisal profile (FAP) model, developed by the author (Lefley, 2000, 2004), is put forward as such a pragmatic model that has general application.

Discussion

Evidence suggests that the financial appraisal methods used by industry to evaluate capital investments may be inappropriate on their own for today's high technology business environment, since they fail to capture many of the strategical benefits from such important projects (Drury and Tayles, 1995; Lefley and Sarkis, 1997; Naik and Chakravarty, 1992). Azzone et al. (1993) argue that traditional methods of evaluating strategic investments in new product development are inadequate, but there is no “dominant” substitute. Mohanty and Deshmukh (1998) argue that, “These models actually fail to incorporate multitude of factors involved in the justification of investment decisions”.

Managers' are placed in a dilemma in that, on the one hand, they wish to invest in projects that may have high strategic implications, but, on the other hand, they find it difficult to justify the capital expenditure for such projects using the traditional financial appraisal techniques. The conventional financial evaluation models are well established, well-documented, while the methodologies for the evaluation of the strategic elements of an investment decision are less formalised and less understood. There is without doubt a need for a broader approach to the appraisal of capital projects, one that consider not only the financial aspects of an investment decision but also the strategic nature of each investment.

A project becomes strategic because it offers the potential to extend the corporate life of an organisation by replacing the dead cells: a process of continuing change (Lefley, 1996). It is from the strategic benefits that invariably the so-called competitive advantages are derived (Lefley, 1997). Aaker (2001) argues that sustainable competitive advantages are crucial to long-term business success.

A review of some of the common strategic models of investment appraisal used by managers

A number of strategic models of investment appraisal have been developed, many of which are in response to a perceived lack of effectiveness of the conventional financial models. Although many of the strategic models have been developed with new technology projects specifically in mind, we would argue that the strategic concepts are equally applicable to all major projects. We would strongly support the argument made by Mohanty and Deshmukh (1998) that the decision-making process has become more strategic as a result of “the ...