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