Much of current management literature focuses on a limited set of 'classical' value levers, such as cost reduction, sales optimization or mergers & acquisitions, thus neglecting another core value lever: capital investments. That capital investments receive such limited attention is all the more surprising when one considers how vitally important they are to the economy as a whole as well as individual businesses.

There is significant value-creation potential in optimizing capital investments. Investments not only determine the asset structure of a venture. They also enable the introduction of new products structural cost reductions. The book focuses on core questions to be answered in the critical design and realization phase of new investments:

• Right positioning - does the competitive situation allow the investment to be successful
• Right technology - how to optimize timing and risks of technology innovations
• Right timing - how to cope with economic cycles
• Right size - how to identify the optimum size of an asset
• Right location - how to find the best location for an asset
• Right design - how to make investments lean and flexible
• Right financing - how to structure the investment financing

The book features an introductory section that provides an overview of investments across the globe, across industries and across time provides practical advice on how to allocate capital to several projects within a company's investment portfolio.

Optimising Fixed Asset Investment is illustrated with real world examples from a range of industries. This book is essential reading for managers faced with challenges of making individual or portfolio capital investment decisions and who are responsible for managing these capital assets over their entire asset lifecycle. The ideas put forward within the book will help to sharpen the focus of management on the impact capital investments have on the well-being and growth of their companies.

Optimizing Fixed Asset Investments is a strategic manual for everyone involved or interested in large fixed-capital investments.

HAUKE HANSEN works as a production manager for ASML in Veldhoven (NL). Prior to his current job he was an Associate Principal in McKinsey's Düsseldorf office. He served high-tech, logistics and telecom companies and supported several multi-billion dollar investment projects. He holds a PhD in physics from the University of Konstanz and was a Fulbright-scholar at the California Institute of Technology.

WOLFGANG HUHN is a Director in McKinsey's Frankfurt office. He primarily serves clients in the high tech industry as well as in energy. Wolfgang is a member of the Business Technology Office where he leads the industrial sector in Europe. He also leads the European Product Development Practice. Prior to joining McKinsey, Wolfgang studied electrical engineering and physics in Aachen and UK and obtained his PhD in Physics from the RWTH Aachen. From 1998 to 2000, Wolfgang was the CEO of a VC-backed company.

OLIVIER LEGRAND is a principal in McKinsey's Paris office. He serves clients in the transportation, steel and aluminum industries as well as in consumer goods and energy. Olivier co-leads McKinsey's global capital productivity group. He holds an MBA from Stanford Business School.

DANIEL STEINERS is an Associate Principal in McKinsey's Düsseldorf office. He serves clients in electric power and chemicals across Europe and North America and is a co-leader of McKinsey's European capital productivity group. Daniel received a diploma in business administration from Münster University and a PhD in management accounting from the European Business School in Oestrich-Winkel.

THOMAS VAHLENKAMP is a Director in McKinsey's Düsseldorf office. He serves clients in the coal, oil, gas, power, and chemicals as well as transportation industries. Thomas is the sector leader of the Energy and Materials Practice in Germany and a member of the leadership group of the European Electric Power and Natural Gas Practice. His educational background is in polymer chemistry. He holds a degree from the Technical University of Aachen (RWTH) and a doctorate from the Max Planck Institute for Polymer Research.

Acknowledgements ix

About the Authors xi

Part I Why Investments Matter 1

1 Introduction 3

1.1 Investments: the forgotten value lever 3

1.1.1 The early bird catches the worm 4

1.2 A bird's-eye view of the book content 6

1.2.1 Part I: Why investments matter 6

1.2.2 Part II: Getting investments right 7

1.2.3 Part III: Right allocation: Managing a company's investment portfolio 9

1.3 Why investments matter: the importance and structure of capital investments 10

1.3.1 The relevance of capital investments 10

1.3.2 The structure of capital investments 16

1.3.3 Time dependence of capital investments 21

1.3.4 The future of capital investments 26

1.4 Summary 27

Appendix 1.1: Wavelet analysis: Extracting frequency information from investment timelines 27

References 29

Part II Getting Investments Right 31

2 Right Positioning: Managing an Asset's Exposure to Economic Risk 33

2.1 Preface 33

2.2 Asset exposure determines the achievable return on an investment 33

2.3 Five levels of protection determine the asset exposure 35

2.4 A simple scoring metric to measure asset exposure 37

2.5 Quantitative asset exposure analysis shows high correlation with ROIC at all levels 42

2.5.1 Using exposure level analysis for benchmarking 45

2.6 Strategies to reduce asset exposure 47

2.6.1 Strategy 1: Create public-private, win-win situations in natural monopoly environments 48

2.6.2 Strategy 2: Foster regulatory conditions that enable sufficient investment levels 49

2.6.3 Strategy 3: Create the right structural conditions and ensure fair access to scarce resources 49

2.6.4 Strategy 4: Establish protection for intellectual property 50

2.6.5 Strategy 5: Achieve a strong commercial position 50

2.6.6 Strategy 6: Minimize fixed capital costs or outsource asset ownership (go "asset light") 52

2.7 Summary 53

3 Right Technology: How to Optimize Innovation Timing and Risks 55

3.1 Capital investments in technology innovation 55

3.1.1 Technology analysis 57

3.1.2 Assess risks 63

3.1.3 Mitigating technology risks 67

3.2 Summary 69

4 Right Timing: How Cyclicality Affects Return on Investments and What Companies Can Do About It 71

4.1 How cyclicality destroys value 71

4.2 Industry drivers of cyclicality 73

4.2.1 Impact of investment lead times 77

4.2.2 Slow-to-no market growth 78

4.2.3 High price sensitivity 78

4.2.4 Investment timing with respect to the cycle 79

4.3 Developing an economic model of cyclicality 81

4.3.1 A fundamental law of economic cycles 81

4.3.2 Base parameters of simple economic oscillations 83

4.3.3 Reaction of cyclical systems to external "excitation" 85

4.3.4 Economic cycles with more than one player present 87

4.4 Measures to cope with cyclicality 90

4.4.1 Reaction delay 91

4.4.2 Reaction strength 92

4.4.3 "Jokers" that can help beat the cycle 92

4.4.4 Where no joker is available 95

4.5 Summary 98

Appendix 4A: A differential equation for economic cyclicality 98

Reference 100

5 Right Size: Balancing Economies and Diseconomies of Scale 101

5.1 Introduction: The role of scale in determining profitability 101

5.2 Asse…