Question

In: Finance

Explain how organizations tht spend "too much" or "too little" on capital investments can each experience...

Explain how organizations tht spend "too much" or "too little" on capital investments can each experience financial difficulties and/or be impacted by their competitors

Solutions

Expert Solution

Solution:-

Organizations that spend too little:-

This is an era of rapid growth where one has to be fast enough to survive in the cut-throat business environment. Every business opportunity comes with the risk of huge competition and the only way to a suire win is to capture the opportunity faster than others. If we really look at business models of companies like Uber, Netflix, Amazon, or pretty much any modern day company, their focus is on rapid growth and expansion rather than immediate profitability. They spend billions in capex to ensure that they capture the leading position in the market before others do so.

The organizations that spend too little on capital expenditure run the risk of being eaten alive by their competitoirs who simply run pass them and beat them to the market. The companies that spend heavily on capex can potentially develop the following durable competitive advantages over the companies that spend too little:

  • Economies of scale due to larger production facilities resulting in lower cost per unit
  • Investments resulting in better product technologies and overall consumer experience
  • More visible and stronger brand by spending heavily on marketing budgets and registering presence in consumer minds
  • Learning curves, trademarks, patents and various other intangibles and innovations achieved through focus on investment and growth
  • Ability to attract better talent

Organizations that spend too much:-

Rapid expansion by way of heavy capex is the way followed by most companies to capture the leading position in the industry they are competing in. However, this could be a double edged sword that can have adverse consequences too. The ways that companies who invest too much in capital spending can have problems are as follows:

  • Money is not the answer to every problem. A lot of times the companies that have bigger war chest think that their larger resources will give them the victory which takes away focus from what might truly be required to win- Focus on innovation, technology, consumer understanding, etc. This is why it often happens that companies who have lesser money to invest in capex still beat the companies that have raised far more money due to their focus on what's truly required to win in that industry while the other was simply focused on spending too much money with no clear direction
  • The heavy spending in capex can result in high levels of debt on the company balance sheets which can land them in trouble, specially in times where demand is slow and growth is hard to come by
  • Too much spending in times when the spending wasn't too productive can rip away the crucial resources that the companies would require in the times of need such as opportunities for acqusitions or expansion into newer markets, etc. This is why its very important to spend wisely at the right time
  • Reckless spending can hamper the ability of companies to raise fresh capital in the market as investors would become vary of such companies

Related Solutions

[20 marks]  Does a market economy provide too little or too much incentive to undertake innovation?  Explain, identifying...
[20 marks]  Does a market economy provide too little or too much incentive to undertake innovation?  Explain, identifying the criterion you are using to answer.  Identify the roles that competition and appropriability play in your answer. [20 marks]  Does empirical evidence show that patents increase innovation rates or not?  Explain, citing evidence and measurement issues as appropriate.   [10 marks]  Compare the static and dynamic welfare effects of using patents to incentivise innovation or, alternatively, using prizes to incentivise innovation. Point out both advantages and disadvantages of...
Identify a product that you think you have paid either too little for or too much...
Identify a product that you think you have paid either too little for or too much for. Identify the pricing strategy you think the company is trying to implement (based on the assigned readings), and then evaluate the effectiveness of the strategy. Use at least two sources to justify your answer. (cannot be an electronic)
Identify a product that you think you have paid either too little for or too much...
Identify a product that you think you have paid either too little for or too much for. Identify the pricing strategy you think the company is trying to implement (based on the assigned reading) and evaluate the effectiveness of the strategy. Use at least two sources to justify your answer. You should also use outside research (at least two sources), evaluate the effectiveness of the strategy, and address the competitors response to the pricing decision.
John was at a pool party. Some of the people had a little too much to...
John was at a pool party. Some of the people had a little too much to drink and a fight broke out. John was hit in the head with a strange object and temporarily lost consciousness. We he regained consciousness, he was lying supine on the ground and someone was putting a compress over his wound. John complained that his vision was blurry so he quickly removed the compress from his head and jumped up. We he stood up, he...
Every firm faces challenges related to growth- either too much or too little. Managers need to...
Every firm faces challenges related to growth- either too much or too little. Managers need to understand the impact of growth on the firm and recognize that "growth at all costs" should not be the main objective of a firm. In this week's module, discuss the balance between growing too quickly and growing too slowly as a firm and what decisions a manager can make to help impact this balance.
What happens if there’s too much money? Too little money? The Phillips curve shows a correlation...
What happens if there’s too much money? Too little money? The Phillips curve shows a correlation between inflation and unemployment. BRIEFLY explain this relationship. What is the mandate of the Federal Reserve (i.e. what is their ultimate goal)?
in written form: Can a person die for having too little thyroid hormone? Please explain.
in written form: Can a person die for having too little thyroid hormone? Please explain.
If you spend $24.00 on average each day eating fast food, how much will you spend...
If you spend $24.00 on average each day eating fast food, how much will you spend on average each month? Assume 30 days in a month.
How much of the $10,000 will you spend? How much will you save? Explain how your decision will impact GDP.
You just received an unexpected gift of $10,000 from a long lost relative. After some consideration, you must decide what you will do with all of this extra money. How much of the $10,000 will you spend? How much will you save? Explain how your decision will impact GDP.
How much customers buy is a direct result of how much time they spend in the...
How much customers buy is a direct result of how much time they spend in the store. A study of average shopping times in a large national houseware store gave the following information (Source: Why We Buy: The Science of Shopping by P. Underhill). Women with female companion: 8.3 min. Women with male companion: 4.5 min. Suppose you want to set up a statistical test to challenge the claim that a woman with a female friend spends an average of...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT