REDESIGNING CAPEX STRATEGY

A business book offers a panoramic reconsideration of capital expenditure strategy, its place in a company’s overall vision, and its significance in the global economy.

According to Weissenrieder and Lindén, capital expenditure is both absolutely crucial to a company’s success and largely deprioritized. For the most part, firms continue to rely on methodological approaches that date back to the 1960s and fail to take advantage of the considerable progress in computer technology—especially regarding calculative measurement—but even more disastrously assume the perch of “analytic thinking” versus “systems thinking.” In other words, each capex project is adopted in a spirit of reactive assessment, with companies seeing a series of isolated opportunities rather than a “holistic” strategy that examines the whole financial picture. In fact, most capex projects do not add any value, and site managers generally pursue them in order to maintain current operations, not maximize shareholder value. As a result of this piecemeal approach, only a “fraction of the capex budget goes to the sites that are the real economic engines of the company—the powerhouses that keep pouring money into the company’s coffers.” The authors eloquently argue that a company’s prospects for success hinge on the creation of an overarching capex vision that includes a 10-to-15-year horizon of predictions: “Why do some succeed where others end up in disaster? It is not that some companies are luckier with pricing or were dealt a better economic hand. It comes from superior capital allocation decisions; it’s how leadership reacts to those conditions. Poor companies result from poor capital allocation and end up with poor competitiveness and cash flow. Companies allocate resources to assets not creating value and starve those that are.” The authors not only limn a comprehensive synopsis of their radical reinterpretation of capex strategy, but also provide painstakingly granular illustrations—they forward a theory, but a thoroughly empirical one well evidenced by their own considerable experience and a wealth of data.

Weissenrieder and Lindén have a great expanse of experience in capex strategy between the two of them, and their expertise is inarguable—they write with immense confidence and intellectual circumspection. Unlike the typical business book today, which promises the world and largely delivers conventional platitudes, this one is equal to its promises, tackling the issue with all the rigor of an academic treatise. But the volume is not a mélange of intellectual abstractions—the authors make an argument and then provide substantiation for their thesis. And while that argument often is necessarily a technically formidable one—this is not a breezy book—they advance their position with much more lucidity than could be reasonably expected. Moreover, they also consider the macro-level impact of reforming capex strategy, which they believe is an essential part of the “virtuous cycle” of creative destruction as well as a healthy global economy that is financially and environmentally sustainable: “Creative destruction is a fundamental fact of free markets and capitalism, and the fundamental drivers of creative destruction are innovation and capital allocation. The smoother the wheels of the creative destruction process can turn, the higher the economic growth.” This is a masterly and analytically scrupulous work, and it should serve as a model for other books in the genre.

A concise and compelling rethinking of an unjustly deemphasized element of corporate strategy.