| Summary: | This work has been primarily concerned with the testing of the hypothesis that the investment performance of small firms is impaired as a result of capital expenditure being motivated more by reaction to events than by conscious strategy. If small firms were intent upon optimum performance then they would presumably seek to achieve this by sound investment programming. But the results of researching 65 small firms in the wider Plymouth area between 1970 and 1975 indicated that firms chose to ignore, and even avoid, certain opportunities to optimise returns on net assets. For example, survival or satisfactory profits only, emerged as fundamental goals. Investment strategies were negative or defensive even if apparent, and capital spending was determined in the majority of cases by the "necessity criterion". Firms clearly preferred to use their own funds for investment purposes and external finance was generally avoided despite profit potential. Companies were mainly indifferent to discounted cash flow and although returns on net assets were superior in the firms employing "operations research" methods, very few respondents were convinced of the benefits of certain management techniques, including D.C.F. Significantly, on an average basis, just over 60% of the sample firms actually failed to reach the target returns on investment which they had set themselves. Hardly any firms had employed consultants and were obviously prejudiced against them despite the absence of actual experience and the fact that rates of return on net assets of the pro-management consultant firms were impressive both in the Plymouth Survey and in the literature. Pricing was based upon rigid criteria, and any flexibility depended upon circumstances rather than policy. Yet flexible pricing did produce superior rates of return. Similarly, outputs were also rigidly determined and levels were rarely manipulated to achieve optimisation of overall performance. Despite an average level of 17% excess capacity, there was negligible market research, market seeking, or advertising, even though sales growth appeared to pay dividends. Finally, there was a significant correlation between returns on net assets and the adoption of a 12 point plan aimed at increasing profitablity. Unfortunately, the 12 point plan was by no means comprehensively employed by the sample firms. In short, the evidence strongly suggested that the firms' overall investment behaviour was generally inconsistent with the goal of optimisation, and in this respect the hypothesis was principally substantiated. Alan Hankinson School of Management Summer 1977.
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