A Multiattribute Optimization Model for Strategic Investment Decisions

Abstract Strategic investment decisions entail intertemporal resource allocation. Given relative resource availability and favourable environmental dynamics, effective strategic investment planning is a major determinant of overall corporate financial performance. This paper advances a methodology for optimizing intertemporal investment decisions through a consensus-oriented process. This process entails identifying the strategic investment factors, their relative importance, and their assumed values relevant to the timing of each investment program. The paper also provides a methodology for determining the system's priority formulation as the model's objective function. This information generates an optimization matrix designated by investment programs and time. This matrix is then optimized through a hierarchical goal-programming model that maximizes overall strategic investment decisions. The model was applied to a major capital investment program in the state of New York. Strategic investment planning entails the in-depth and comprehensive assessment and integration of the internal and external factors and forces that impact longrange institutional performance. Strategic investment decisions are referred to as those decisions that entail the organization's comprehensive long-range financial perspective, grounded upon its mission and strategic objectives. The hypothetical case of a strategically diversified company considering the financing of a number of projects P1, P2, P3, Pn over the next several years is a case in point. While the feasibility of each project should be closely scrutinized and evaluated on its merits, the organization may wish to consider these investment undertakings in a way that will enhance its overall multiperiod investment performance. Due to the scarcity of resources that confronts all organizations, not all desired projects can be implemented simultaneously. Some projects may have to be postponed pending resource availability, or when their utility becomes timely. Other projects may have to be accelerated to be more beneficial. The question is, then, on what basis should such decisions be made so that the organization's overall financial performance is maximized? In the absence of any current methodology to optimize a multiattribute investment decision over a multiperiod horizon, this paper advances a methodology for achieving goal optimization, using a heterogeneous group decision process, in the face of incongruent or competing goals. Before developing any modelling framework for optimizing decisions, the authors studied the structure of the problem. Parallel to Kooros (1994), our studies led to several conclusions on the feasibility of 1. Identifying the corporate strategic investment performance factors (SIFs) that inherently affect the organization's decision making and its overall product planning and financial strategy; 2. Determining objectively the relative importance of these factors, whose sum constitutes the decision preference, or the model's objective function; 3. Identifying conditions under which these factors are affected, with time as the common denominator; and 4. Structuring an appropriate modelling framework capable of optimizing investment strategies, i.e., determining which investment project should be considered in a specific time frame in order to maximize the overall financial performance. In our study of the literature, which included a comprehensive review of the empirical and theoretical literature on manufacturing investment evaluation by Proctor and Canada (1992) and other scholars, we found very little treatment of intertemporal investment optimization. This paper deals with two fundamental concepts, (a) the development of a modelling framework to optimize investment decisions over time, and (b) the utilization of a group decision system to quantify and test the model. Its contribution is the development of a decision analysis, its quantification of judgmental decision parameters, and its application to an optimization model to aid consistent and rational decision making through a structured multiattribute decision process. …