Focusing on the core value levers companies can apply in the decision and design phase of capital investments, this book is the first to cover this topic in a holistic, practical and strategic manner, and is based on McKinseys extensive industry analysis and research. The book examines this topic by looking at the challenges in making correct decisions on capital investment in the following ways: Risk exposure: outlining a framework for measuring the risk exposure of an asset relative to the return and giving examples of how market players can follow different strategies, depending on the protective circumstances and challenges they face. Technology: Product and process innovations often require investments in new assets. The book describes a quantitative model to identify the right technology and the best investment time for switching from a current to an innovative technology. Timing: Price cycles are a well-known and much-feared phenomenon in many capital-intensive industries. The book describe a model for assessing capital investments and the levers managers can use to tame the cycle, e.g., influencing industry conduct by investing counter-cyclically as the most important strategy for market leaders. Size: Building a new asset that is too small or too big can destroy a lot of value. Decision makers therefore need to find the lowest-possible unit costs. Often economies of scale are taken into account, while diseconomies are disregarded both complexity costs as well as “risks of size.” By integrating these views, we have found that the lowest-possible unit cost occurs in a wide capacity range, because economies and diseconomies of scale balance each other. This leads to smaller-than- usual assets. We describe a quantitative model that illustrates the impact of economies and diseconomies of scale on the cost curve of an investment. Location: Guidelines for choosing the right location in a globalized asset network. Financing: Asset-heavy companies can use their superior understanding of investment risks to optimize their financing structure and thereby create more value. The book also covers governmental incentives and how companies and governments can create a win-win situation in defining the optimal investment incentives. The book includes many industry-specific examples, focusing on seven asset-heavy industries: Utilities, Oil & Gas, Telecommunications, Transportation & Logistics, Chemicals, High Tech, and Automotive. These industries cover about 35% of all global annual investments.
Book Details:
- Author: Hauke Hansen
- ISBN: 9780470685198
- Year Published: 2011
- Pages: 232
- BISAC: BUS017000, BUSINESS & ECONOMICS/Corporate Finance / General
About the Book and Topic:
Focusing on the core value levers companies can apply in the decision and design phase of capital investments, this book is the first to cover this topic in a holistic, practical and strategic manner, and is based on McKinseys extensive industry analysis and research. The book examines this topic by looking at the challenges in making correct decisions on capital investment in the following ways: Risk exposure: outlining a framework for measuring the risk exposure of an asset relative to the return and giving examples of how market players can follow different strategies, depending on the protective circumstances and challenges they face. Technology: Product and process innovations often require investments in new assets. The book describes a quantitative model to identify the right technology and the best investment time for switching from a current to an innovative technology. Timing: Price cycles are a well-known and much-feared phenomenon in many capital-intensive industries. The book describe a model for assessing capital investments and the levers managers can use to tame the cycle, e.g., influencing industry conduct by investing counter-cyclically as the most important strategy for market leaders. Size: Building a new asset that is too small or too big can destroy a lot of value. Decision makers therefore need to find the lowest-possible unit costs. Often economies of scale are taken into account, while diseconomies are disregarded both complexity costs as well as “risks of size.” By integrating these views, we have found that the lowest-possible unit cost occurs in a wide capacity range, because economies and diseconomies of scale balance each other. This leads to smaller-than- usual assets. We describe a quantitative model that illustrates the impact of economies and diseconomies of scale on the cost curve of an investment. Location: Guidelines for choosing the right location in a globalized asset network. Financing: Asset-heavy companies can use their superior understanding of investment risks to optimize their financing structure and thereby create more value. The book also covers governmental incentives and how companies and governments can create a win-win situation in defining the optimal investment incentives. The book includes many industry-specific examples, focusing on seven asset-heavy industries: Utilities, Oil & Gas, Telecommunications, Transportation & Logistics, Chemicals, High Tech, and Automotive. These industries cover about 35% of all global annual investments.
In 2005, more than USD 8,800 billion was spent on capital investments globally a sum equivalent to the combined 2005 GDP of Japan, China, India, South Korea, and Taiwan. Since the mid-1990s, asset-heavy companies have increased their return on invested capital (ROIC) by 4.1%; and half of this increase (55%) is related to investment activities. Because no two capital investments are identical, managing capital investments for a maximum return requires a different approach from managing operating expenses. Given that experience from capital investment optimization projects show a value creation potential of 15 – 40%, asset-heavy companies need to make greater use of this lever.
· McKINSEY PLATFORM: Promotion through McKinseys global offices to their client base · PRACTICAL AND STRATEGIC: a hands on guide for the CFO/CEO backed with extensive knowledge and empirical evidence · ASSESSMENT OF VALUE CREATION LEVERS: Based on McKinseys industry and company analyses about what constitutes a best-practice capital strategy. Book also includes results of survey of capital-intensive companies.
About the Author
Wolfgang Huhn (Frankfurt, Germany): Director at McKinsey and member of the Business Technology Office where he leads the industrial sector Olivier Legrand (Paris, France): Principal at McKinsey and member of the Operations Practice and the Capital Productivity Practice Daniel Steiners (Dusseldorf, Germany): Associate Principal at McKinsey, member of the Global Energy and Materials Practice, and member of the Capital Productivity Practice Thomas Vahlenkamp (Dusseldorf, Germany): Director at McKinsey and leader of the Global Energy and Materials Practice in Germany. Hauke Hansen (Dusseldorf, Germany): Director at ASML, the world’s leading provider of lithography systems for the semiconductor industry, formerly at McKinsey All of the authors have advised clients on major capital investment optimization projects in industries such as Automotive, Utilities, Mining, Semiconductors, Telecommunications, and IT.