Time Horizons and Technology Investments (1992) / Chapter Skim
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2 Explaining Time Horizons and Technology Investments
2 Explaining Time Horizons and Technology Investments
Pages 12-25
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From page 12... ...
62. There is no single or standard definition of the term time horizon and no agreement on what business functions are affected by time horizons that are too short.
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From page 13... ...
In addition, companies in different industries obviously face different time horizons as a function of different economic, technological, market characteristics, and competitive conditions. Figure 1 shows the variation in company options through the Over 20 16 co ct a)
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From page 14... ...
Industry-specific variation in time-dependent business matters illustrates an important point about time horizons: that individual company management and governance practices play a fundamental role in determining time horizons. Companies in industries with long product or market development cycle times-pharmaceuticals or airframes, for example must have relatively long investment horizons.
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From page 15... ...
· Figure 2b shows a prototyping, development, and marketing project with rapidly accumulating initial investment expense and a relatively quickly occurring and high-volume revenue stream. · Figure 2c shows the cash flow of an investment in new production equipment-a very expensive investment with rapidly accruing and large cost savings.
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From page 16... ...
corporate management using a project analysis and management tool (time-to-break-even graphs) , it should be clear that the argument applies broadly to management decisions.
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From page 17... ...
Constantly fluctuating tax or regulatory policy, rapidly changing currency exchange rates, significant uncertainty about market acceptance of a new technology, or a cadre of well-funded, aggressive competitors can all increase the apparent value of a manager who focuses on the immediate future. THE MECHANICS OF CAPITAL COSTS, RISK, AND THE SPECIAL CHARACTERISTICS OF INVESTMENTS IN TECHNOLOGY DEVELOPMENTS The cost of capital the required expected return derived from uncertain future cash flows can dramatically affect the time profile of investment decisions.
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From page 18... ...
financial markets-the capital market line. Any individual financial investment, or a)
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From page 19... ...
Although it is widely recognized that risk affects required expected return both within companies and in financial markets, it is less well understood that the character of commercial technological advance poses special problems both for investors (financial markets) and for managers working with investment hurdle rates as a guide in making difficult investment allocation decisions.
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From page 20... ...
The economy has developed a variety of mechanisms to provide patient capital to support new commercial technologies. Financial markets do allow investors with a preference for high-risk, high-potential, long-term payout investments to get access to new, potentially successful technology-based 3Tangible and intangible investments are also treated very differently for accounting purposes.
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From page 21... ...
and technological risk-takers depending on how their industry is perceived and the state of the economy-may have no effective access to capital despite reasonably good company prospects. Investment Hurdle Rates and Technology Investments With regard to investment hurdle rates in management decision making, the primary issues related to technology investments revolve around ways in which management assesses and handles technological or market uncertainty in investment decision making.
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From page 22... ...
Whether or not decision makers formally reduce risk factors to a premium added to an investment hurdle rate, it is obvious that the relevant internal cost of capital (investment hurdle rate) for technology investments is specific to the investment.
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From page 23... ...
DETERMINANTS OF COMPANY INVESTMENT TIME HORIZONS As discussed earlier, there is considerable variation in industry-specific time constraints for such things as market life and product development cycle. Some important determinants of time horizons obviously operate for entire industries or industry segments.
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From page 24... ...
This link between risk and short time horizons is quite explicit in the role that capital costs and investment hurdle rates play in investment decision making in companies; the more risky the project or venture the more likely it is that both financial markets and internal management decision making processes will require a higher expected return. i3LlV~l~ ~1 at, $~$ ~ ~4 ~ ~^ ,,a, _~ The relationship between risk and investment time horizons is particularly important with regard to investments in the development and deployment of new product or process technologies.
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From page 25... ...
Finally, the design and implementation of government policy can affect the time horizons of companies. This diversity of influences on corporate time horizons implies that no single actor can unilaterally lengthen investment time horizons.
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