CAPEX Excellence: Optimizing Fixed Asset Investments

by Hauke Hansen (McKinsey); Wolfgang Huhn (McKinsey); Olivier Legrand (McKinsey); Daniel Steiners (McKinsey); Thomas Vahlenkamp (McKinsey)

• ISBN13: 9780470748763
• ISBN10: 0470748761
• Format: eBook
• Copyright: 2009-08-01
• Publisher: Wiley

Summary

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 McKinsey's extensive industry analysis and research. The book comprehensively examines the challenges in making decisions on capital investment. It includes many examples from seven asset-heavy industries: Utilities, Oil & Gas, Telecommunications, Transportation & Logistics, Chemicals, High Tech, and Automotive. Executive-level decision makers will appreciate this innovative toolbox for increasing return on assets.

Table of Contents

Acknowledgements

About the Authors

Why Investments Matter

Introduction

Investments: the forgotten value lever

The early bird catches the worm

A birds-eye view of the book content

Part I: Why investments matter

Part II: Getting investments right

Part III: Right allocation: Managing a company's investment portfolio

Why investments matter: the importance and structure of capital investments

The relevance of capital investments

The structure of capital investments

Time dependence of capital investments

The future of capital investments

Summary

Wavelet analysis: Extracting frequency information from investment timelines

References

Getting Investments Right

Right Positioning: Managing an Assets Exposure to Economic Risk

Preface

Asset exposure determines the achievable return on an investment

Five levels of protection determine the asset exposure

A simple scoring metric to measure asset exposure

Quantitative asset exposure analysis shows high correlation with ROIC at all levels

Using exposure level analysis for benchmarking

Strategies to reduce asset exposure

Strategy 1: Create public-private, win-win situations in natural monopoly environments

Strategy 2: Foster regulatory conditions that enable sufficient investment levels

Strategy 3: Create the right structural conditions and ensure fair access to scarce resources

Strategy 4: Establish protection for intellectual property

Strategy 5: Achieve a strong commercial position

Strategy 6: Minimize fixed capital costs or outsource asset ownership (go "asset light")

Summary

Right Technology: How to Optimize Innovation Timing and Risks

Capital investments in technology innovation

Technology analysis

Assess risks

Mitigating technology risks

Summary

Right Timing: How Cyclicality Affects Return on Investments and What Companies Can Do About It

How cyclicality destroys value

Industry drivers of cyclicality

Impact of investment lead times

Slow-to-no market growth

High price sensitivity

Investment timing with respect to the cycle

Developing an economic model of cyclicality

A fundamental law of economic cycles

Base parameters of simple economic oscillations

Reaction of cyclical systems to external "excitation"

Economic cycles with more than one player present

Measures to cope with cyclicality

Reaction delay

Reaction strength

Jokers that can help beat the cycle

Where no joker is available

Summary

A differential equation for economic cyclicality

Reference

Right Size: Balancing Economies and Diseconomies of Scale

Introduction: The role of scale in determining profitability

Assessing economies of scale

Fixed cost leverage

Decreasing unit costs

Equipment utilization/chunkiness of capacity

Critical size

Determining diseconomies of scale

Cost elements

Risk elements

Utilization risks

Market reaction risks

Technology risks

Timing risks

An approach for finding the "sweet spot"

Scale effect model

Real-life examples

Automotive industry case example

Base chemicals case example

Summary

Reference

Right Location: Getting the Most from Government Incentives

Government incentives: An overview

Creating public-private, win-win situations

Common types of incentive instruments

Subsidies

Financing support

Tax relief

Other types of government incentives

The financial impact of incentives: A modeling approach

General impact of subsidies

General impact of financing support

General impact of tax relief

Specific impact of incentives on different industries

Geographical differences in incentive structures

Managing government incentives

Summary

References

Right Design: How to Make Investments Lean and Flexible

Lean design as a competitive advantage

The lean way: Moving from capital investment projects to a lean design system

The three dimensions of a lean capital investment system

Dimension 1: The technical system

Start with project objectives, design princisples, and target setting

Value engineering and lean tools

Design optimization

From the basic design to start of production

Anchoring tools and practices to formal standards

Dimensions 2 & 3: Management infrastructure, mindset and behavior

Project organization and performance management

Institutionalization and learning

Adapting the system to local specifics: Project design cannot be "one size fits all"

Getting started

Flexibility: Just what customers and the company need and no more

Macro-level flexibility: modularity in plant design to ensure flexible, cost-efficient assets

Midi-level flexibility in plant design: cater for product portfolio diversity

Micro-level flexibility in plant design: design for iso-productivity

How to avoid creating a front-page disaster: Anticipating what can go wrong

Performance management and decision making

Tools which every company and project team need to master

Cross-functional coordination

Summary

References

Right Financing: Shaping the Optimal Finance Portfolio

Why Financing Matters

Three-Step Financing Approach

Step 1: Evaluating the investment's cash flow parameters

Step 2: Assessing investment risks

Step 3: Composing the financing portfolio

Summary

References

Right Allocation: How to Allocate Money Within the Company

Key requirements for capital allocation

Four models of the corporate center role in shaping the investment portfolio

Capital allocation approach for operators and strategic controllers

Step 1: Treat special projects as high priority

Step 2: Allocate remaining capital to business units

Step 3: Business units distribute capital to individual investments

Step 4: Implement a capital assurance process

Improving the "capital allocation key"

Capital allocation backbone

Capital allocation approach for strategic architects and financial holding structures

Summary

References

Index

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