Strategy in the Age of Superabundant Capital
Very interesting article from HBR. When debt & equity is cheap like today, cost of capital is around 6% it pays more to find growth than to optimize margins (see graph below). If you manage to create 1% growth it change the value of the company by 27%!
How to grow? bet in many directions even at the risk of lower FOCUS. somethings will work big time.
FROM HBR
FROM THE MARCH–APRIL 2017 ISSUE
Today financial capital is no longer a scarce resource—it is abundant and cheap. Bain’s Macro Trends Group estimates that global financial capital has more than tripled over the past three decades and now stands at roughly 10 times global GDP. As capital has grown more plentiful, its price has plummeted. For many large companies, the after-tax cost of borrowing is close to the rate of inflation, meaning that real borrowing costs hover near zero. Any reasonably profitable large enterprise can readily obtain the capital it needs to buy new equipment, fund new product development, enter new markets, and even acquire new businesses. To be sure, leadership teams still need to manage their money carefully—after all, waste is waste. But the skillful allocation of financial capital is no longer a source of sustained competitive advantage.
The assets that are in short supply at most companies are the skills and capabilities required to translate good growth ideas into successful new products, services, and businesses—and the traditional financially driven approach to strategic investment has only compounded this paucity.
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