Capital is becoming scarce, and 2009 will clearly not be a good year for the real economy. The financial and money market crisis forces companies that had been well and truly on course for growth to make drastic cuts in their investment budgets. Of course, everyone is also talking about the opportunities that the crisis presents – lower purchase prices and anticyclical growth are long-term value levers. But sadly, this is true only in theory. The reality is rather different: universal investment freezes or 30-percent cutbacks inform the management agenda in a way that has seldom been seen in the past.
While, in the last years of the boom, it was still possible to have very different investment focuses, it is a different story in the current crisis. The dilemma: fresh capital is usually invested in exactly where it was invested in the past; the bottom-up driven process of capital allocation again builds up capital in the hands of the well-established entities – particularly in times of crisis.
In all, there are five typical traps to avoid in capital allocation:
1. The reinvestment trap: a fixed percentage of the depreciation as the base investment budget
2. The cycle trap: the past returns as the allocation ratio
3. The opportunity trap: “the squeakiest wheel gets the most oil”
4. The “cash is king” trap: decentralized claims to ownership of the generated cash flow
5. The responsibility trap: lack of top-down goal-setting and absence of capital costs in the performance assessment
These traps can be avoided only by means of consistent top-down management and active management of the business portfolio. Long-term success will be achieved by the party that breaks with old conventions and demonstrates strategic leadership.