Nijenrode Studies in Business – serie

The ending of the decade of the seventies and the dawning of the eighties can be characterized as a period of great uncertainty with prospects for economic­ political instability. High inflation and fluctuating exchange rates in the de­ veloped Western world have served to strengthen the forces of disequilibrium in the fmancial markets, leading to an investment situation with several unusual but significant factors. Capital spending by business, leading to the creation of new jobs, has not been reduced substantially during this period of uncertainty, as happened in similar periods in the past. This is shown in part by the continuing low unemployment rates in evidence during the period, which are in contradic­ tion to the trend exhibited in similar past periods. The expanding financing re­ quirements resulting from high price inflation have led to an increase in the capital intensity of firms, and thus to enhanced sensitivity of their income streams to economic fluctuations. At the same time, the record high interest rates that companies have had to pay to acquire this inflated amount of capital have caused a deterioration in the safety or quality indica tors by which the creditworthiness of the firms is judged. These developments tend to increase vii viii INTRODUCTION the stakes involved in business decision making. One important repercussion of this is that greater attention is now being focused on improving the quality of investment decisions.

The old ways break down, times change, and new life blossoms from the ruins. Frederich Schiller These words of a great poet express a basic fact of life-the inevitability of change. If marketers were asked to envision the future, they would not hesitate to answer that the entire globe is involved in a human revolution like no other in history. The changes now taking place, in both industrially developed and developing nations, are indications of the problems, chal­ lenges, and opportunities confronting future economic growth and development. Perhaps the most prominent characteristic of this change is the growing economic interdependence of all nations. Today it seems quite unnecessary to point out that any nation's problems and opportunities anywhere are now every nation's problems and opportunities everywhere. This economic and business interdependence on a global scale is the new reality, regardless of whether we want to accept it. The task ahead for all corporate managers becomes one of adapting to this new international business reality. It also requires them to assume the leadership role in helping individuals of all nations to become more and more aware of their mutual need for another's products and services. Today every corporation, whether confined within one nation or not, operates in this dynamic, changing, international business environment.

In August 1976 the research seminar 'Decision-making in business' was organized at Nijenrode, The Netherlands School of Business. More than fifty scientists and practitioners from nine countries presented research papers in one of the six discussion groups. Some ofthem also presented some of their ideas in front of a large mixed audience at a one-day symposium. Many of the papers presented at Nijenrode were of such a high quality that the decision to publish a selection of them was an easy one. At the same time the new series Nijenrode studies in business was initiated. All who were involved, the policy committee 'Of the Nijenrode studies, the advisory and editorial board of the series, the publisher, and the organizing committee of the seminar and symposium, acclaimed the idea of publishing three volumes in the new series. A collection of eleven papers could be grouped under the title Trends in managerial andfinancial accounting, and has been published as volume 1 of this series. A collection of fourteen papers has been published as the second volume under the title Trends in financial decision­ making, while this volume, consisting of twelve papers (and an introduction) explores the theme Trends in business ethics. The introduction by Stanley L. Jakiwas written for the symposium. It suggests why the papers of Pjotr Hesseling, Antoine Kreykamp, and Richard H. Viola, which were not presented at Nijenrode, are introduced here.

In August, 1976 the research seminar 'Decision-making in business' was organized at Nijenrode, The Netherlands School of Business. More than fifty scientists and practitioners from nine countries presented research papers in one of the six discussion groups. Some of them also presented some of their ideas in front of a large mixed audience at a one-day symposium. Many of the papers presented at Nijenrode were of such a high quality that the decision to publish a selection of them was an easy one. At the same time the new series Nijenrode studies in business was initiated. All who were involved, the policy committee of the N ijenrode studies, the advisory and editorial board of the series, the publisher, and the organizing committee of the seminar and symposium, acclaimed the idea of publishing three volumes in the new series. A collection of eleven papers could be grouped under the title Trends in managerial andfinancial accounting. Another collection will be published as volume 2 of this series under the title TI'ends in financial decision-making, while volume 3 will consist of papers exploring the theme Trends in business ethics. The books are intended for those who are interested in new developments in the decision-making area. They are especially suitable for graduate or advanced undergraduate courses: volume 1 in managerial or financial accounting courses; volume 2 in courses on managerial finance, capital budgeting or decision­ making; and volume 3 in courses on business ethics or related fields.

In August, 1976 the research seminar 'Decision-making in business' was organized at Nijenrode, The Netherlands School of Business. More than fifty scientists and practitioners from nine countries presented research papers in one of the six discussion groups. Some of them also presented some of their ideas in front of a large mixed audience at a one-day symposium. Many of the papers presented at Nijenrode were of such a high quality that the decision to publish a selection of them was an easy one. At the same time the new series Nijenrode studies in business was initiated. All who were involved, the policy committee of the N ijenrode studies, the advisory and editorial board of the series, the publisher, and the organizing committee of the seminar and symposium, acclaimed the idea of publishing three volumes in the new series. A collection of eleven papers could be grouped under the title Trends in managerial andfinancial accounting. Another collection will be published as volume 2 of this series under the title TI'ends in financial decision-making, while volume 3 will consist of papers exploring the theme Trends in business ethics. The books are intended for those who are interested in new developments in the decision-making area. They are especially suitable for graduate or advanced undergraduate courses: volume 1 in managerial or financial accounting courses; volume 2 in courses on managerial finance, capital budgeting or decision­ making; and volume 3 in courses on business ethics or related fields.

The ending of the decade of the seventies and the dawning of the eighties can be characterized as a period of great uncertainty with prospects for economic­ political instability. High inflation and fluctuating exchange rates in the de­ veloped Western world have served to strengthen the forces of disequilibrium in the fmancial markets, leading to an investment situation with several unusual but significant factors. Capital spending by business, leading to the creation of new jobs, has not been reduced substantially during this period of uncertainty, as happened in similar periods in the past. This is shown in part by the continuing low unemployment rates in evidence during the period, which are in contradic­ tion to the trend exhibited in similar past periods. The expanding financing re­ quirements resulting from high price inflation have led to an increase in the capital intensity of firms, and thus to enhanced sensitivity of their income streams to economic fluctuations. At the same time, the record high interest rates that companies have had to pay to acquire this inflated amount of capital have caused a deterioration in the safety or quality indica tors by which the creditworthiness of the firms is judged. These developments tend to increase vii viii INTRODUCTION the stakes involved in business decision making. One important repercussion of this is that greater attention is now being focused on improving the quality of investment decisions.

Project Set Strategies focuses on an issue of vital concern to corporate managers: the development and implementation of strategy. Regretfully, this topic has received too little attention in the literature of finance and has been treated in­ completely in the management journals. In fact, not everyone recognizes that it falls within the sphere of finance. However, since the important issues discussed in this book strategically shape the destiny of the company and can seal its fate long before the point is reached where conventional finance considerations come into play, it is essential that this recognition be acknowledged. From the management point of view, it has long been realized that strategic elements playa crucial role in the continued well-being of the firm. Nevertheless, this truth is overlooked to some extent with most management techniques since there is insufficient typification, often leading to unjustified generalizations and inadequate attention to the requirements of the specific situation. Also, these management techniques are not grounded upon the long-established fmancial economic theories of valuations and thus can lead to misdirected guidance. Since the two academic disciplines of "management" and "finance" have much insight to offer each other, this book represents an effort to link the strategic management area to a theoretically sound and usable financial e- xv xvi PREFACE nomic foundation. In this way, the probability of errors of omission or unjusti­ fied generalizations is decreased and help is offered for ascertaining more relevant goal-directed recommendations.

The old ways break down, times change, and new life blossoms from the ruins. Frederich Schiller These words of a great poet express a basic fact of life-the inevitability of change. If marketers were asked to envision the future, they would not hesitate to answer that the entire globe is involved in a human revolution like no other in history. The changes now taking place, in both industrially developed and developing nations, are indications of the problems, chal­ lenges, and opportunities confronting future economic growth and development. Perhaps the most prominent characteristic of this change is the growing economic interdependence of all nations. Today it seems quite unnecessary to point out that any nation's problems and opportunities anywhere are now every nation's problems and opportunities everywhere. This economic and business interdependence on a global scale is the new reality, regardless of whether we want to accept it. The task ahead for all corporate managers becomes one of adapting to this new international business reality. It also requires them to assume the leadership role in helping individuals of all nations to become more and more aware of their mutual need for another's products and services. Today every corporation, whether confined within one nation or not, operates in this dynamic, changing, international business environment.

The business environment, particularly after the continuing oil crises of the seventies, can be characterized as evolving rapidly in complex and often unpre­ dictable ways. Such things as high interest and inflation rates, fluctuating ex­ change rates, volatile commodity markets, and increasing political turmoil have led to a situation in which explicit consideration of environmental dynamics is becoming much more important for successful business planning than was true in the past. Companies are finding that it is no longer possible to conduct "busi­ ness as usual" under these changing circumstances. Rather, decision makers are having to be more cognizant of the many sources of uncertainty that could have serious impacts on the continued prosperity of the firm, as well as of actions that can be taken so that the company can thrive in spite of these greater uncertainties. Businesses have responded to these challenges by giving more thorough con­ sideration to strategic issues. Whereas in the past the steady progression of mar­ kets and technology was taken for granted, the uncertainties associated with increased worldwide competition, as well as with other exogenous factors, have vii viii INTRODUCTION forced companies to think more about flexibility. This involves not only how best to exploit profitable current options, but also how to position themselves at present to be able to respond appropriately to threats and opportunities as they arise in the future. Unfortunately, in this redirection of outlook, the fmance profession has not kept pace.