CAPEX Excellence – Optimizing Fixed Asset Investments Optimizing fixed asset investments

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.  

Acknowledgements About the Authors Part I Why Investments Matter 1 Introduction 1.1 Investments the forgotten value lever 1.2 A birds-eye view of the book content 1.3 Why investments matter the importance and structure of capital investments Appendix A1 Microeconomics background: the relevance of capital investments Appendix A2 Wavelet analysis: extracting frequency information from investment timelines References Part II Getting Investments Right 2 Right Positioning: Managing an Assets Exposure to Economic Risk 2.1 Introduction 2.2 The level of asset exposure determines the achievable return 2.3 The level of protection determines the degree of exposure of an investment 2.4 A simple scoring metric to measure asset exposure 2.5 Quantitataive asset exposure analysis shows high correlation with ROIC at all levels 2.6 Strategies for reducing asset exposure   3 Right Technology: How and when to invest in a new technology 3.1 Capital investments in technology innovation   4 Right Timing: How Cyclicality Affects Return on Investments and What Companies Can Do About It 4.1 How cyclicality destroys value 4.2 Industry drivers of cyclicality 4.3 Developing an economic model of cyclicality 4.4 Measure to cope with cyclicality Appendix 4A A differential equation for economic cyclicality   5 Right Size: Balancing Economies and Diseconomies of Scale 5.1 Introduction: The role of scale in determining profitability 5.2 Assessing economies of scale 5.3 Determining diseconomies of scale 5.4 Risk elements 5.5 An approach for finding the sweet spot 5.6 Real-life examples 6 Right Location: Getting the Most from Government Incentives   6.1 Government incentives: an overview 6.2 Creating public-private, win-win situations 6.3 Common types of incentive instruments 6.4 The financial impact of incentives: a modeling approach 6.5 Geographical differences in incentive structures 6.6 Managing government incentives   7 Right Design: How to Make Investments Lean and Flexible 7.1 Lean design as a competitive advantage 7.2 The three dimensions of a lean capital investment system 7.3 Flexibility: just what customers and shareholders need and no more 7.4 How to avoid creatig a front-page disaster: anticipating what can go wrong   8 Right Financing: Shaping the Optimal Finance Portfolio 8.1 Why financing matters 8.2 Three-step financing approach   Part III: Right Allocation: Managing a Companys Investment Portfolio 9 Right Allocation: How to Allocate Money Within the Company 9.1 Key requirements for capital allocation 9.2 Four models of the corporate centre role in shaping the investment portfolio 9.3 Capital allocation approach for operators and strategic controllers 9.4 Capital allocation approach for strategic architects and financial holding structures Index