Sunday, April 16, 2017

Three New Rules in The Era of Capital Surplus

Over the past few decades, financial capital has been the most valuable resource in the eyes of corporate leaders, and they are trying to make every penny on the most promising projects. But recently, three of Bain's consultants have pointed out in an article in the Harvard Business Review that the scarcity of capital has passed and that we have entered the era of overcapacity. So, in the past, the kind of financial-oriented traditional strategic investment is outdated, companies need to make changes in the way of investment.

First of all, why now has entered the era of capital surplus? As the Bain Macro Trends team found that the growth of global financial assets in recent years has increased from 6.5 times the global GDP in 1990 to 9.5 times the global GDP in 2010, and it is expected that by 2020, The world is expected to GDP about 10 times. There are two main factors: First, the financial markets of emerging economies are constantly developing; Second, the number of "high savings" will continue to increase in the impact of global economic savings factors, The number of people aged 45 to 59 is of the utmost importance. Since the people of this age have already spent the major years of consumption, they have a higher proportion of savings and capital accumulation than others. So the article predicts that this market is in a period of excess capital, too much capital to chase too little investment opportunities, at least until 2030.

Secondly, the article puts forward three investment rules of the era of capital surplus.
The first rule reduces the threshold ratio. At the time of the new investment, almost all large companies will set a threshold ratio, that is, the minimum expected rate of return that the planned investment must meet. Once you exceed this minimum expected rate of return, you can invest. This approach is generally to encourage companies to invest in those who meet the high threshold ratio of "safe project."

But most companies in the past many years, have not significantly adjusted the threshold ratio, which led to the enterprise refused a lot of investment opportunities, but also a significant loss of investment is still reluctant to let go. Ultimately, the company has accumulated a lot of cash is not a good place, most can only choose to redeem the stock. This approach to a certain extent, sent a negative signal to investors, indicating that the management of investment ideas have dried up.

So the article suggests not to invest in long-term large-scale investment projects as in the past, but to invest in small areas in different areas, and should invest in new products, new technologies and new business development. The second rule focuses on growth. In the past, the scarcity of capital, most companies practice is not to develop new business and new capabilities, but continue to fine-tune the existing operations, in other words, is in the investment, more concerned about how to improve profitability, And not pay attention to growth, which resulted in a decline in the innovation rate.

The article argues that the return on investment in terms of growth is so high when capital costs are so low. So you want to be successful, you have to optimize the existing business at the same time, to pay attention to new growth opportunities.

If companies want to change the strategy, pay attention to growth, how to do it? In addition to developing formal processes and encouraging business innovation, the article also recommends that the organizational model be reevaluated or an informal process can be used to reward ongoing business expansion. For example, 3M company to allow researchers to 15% of the work time to do their own want to do the project, without the approval of the company, this individual R & D but to the company to provide a lot of new products.

The third rule is to invest in experiments. When capital is scarce, managers decide to spend money before, to determine the money is worth it, and then decided to start action. But in the era of excess capital, gave us more opportunities to try. The article says that if the company sees the investment as an experiment, it can be freed out to make more investment than the competitor's response, which is very important in a rapidly changing market.

Finally, the article points out that in the new era, human capital, that is, time, talent, employees' energy, and the creativity and creativity they create are the fundamental sources of competitive advantage. Studies have shown that the management of financial capital on the basis of careful and rigorous management of human capital performance of the company far more than other companies. Therefore, some companies should focus on the management of financial capital from the transfer to the time, talent and energy of these really scarce resources management up.

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