the Economist says Mr Obama plans big spend to fix US infrastructure. Origins of problems that led to bridges collapsing, water mains bursting, and massive sewage leaks are easy to see – politicians can always put off long-term investment in favour of short-term give-aways. But CEOs face similar temptations. Read on for a detailed explanation of this topic and an exercise to try for yourself …
This has become particularly prevalent since the fashion for privatising utilities – water, gas, power, rail – but was already an issue in commercial asset-intensive industries, such as steel and oil. Management can always defer capital and current spend with long-term payback because the short-term damage will be insignificant – for a while. Then, the accumulated under-spend finally breaks out in frequent, big problems. Bear in mind that in many of the industries affected, very little can be done about market-facing strategy – folk don’t generally want a lot more sewage services or power supplies. For these companies, strategic management is dominated by choices on management and investment of capital intensive assets.
It’s not as simple, though, as spend v. not-spend – there are many choices and trade-offs. Should we up the maintenance rate on deteriorating assets or fix them well when they break down, should we replace the most unreliable assets or refurbish them, etc?
Here’s a section from chapter 6 of Strategic Management Dynamics explaining the issues, and here is a simulation exercise to try the challenge for yourself. It’s a zip file with a slide and model – run the slide show. You will need our mystrategy software for this – the free Reader will do fine.
I must thank my friend Bob Thurlby of Serco PLC who does a lot of practical work on strategy in asset intensive businesses for the opportunity to develop these insights.