Strategy in the Age of Superabundant Capital

Money is no longer a scarce resource. That changes everything.

by

and

David Harding

by

and

David Harding

From the Magazine (March–April 2017) · Long read

Caspar Benson/Getty Images

Summary.

For much of the past five decades, financial capital was considered a scarce resource. Today, however, capital is abundant and cheap, and the authors expect that to be the case for another 20 years or more. They point out that global financial assets have been growing faster than global GDP, and they explain why that trend is likely to continue. They note, too, that as the supply of capital has increased, the cost has plunged, making it possible for many large firms to borrow funds for next to nothing. What all this means is that companies can no longer sustain competitive advantage simply by allocating capital skillfully.

In this new climate, the authors argue, business leaders need to lower hurdle rates and change their investment strategy, moving away from a few big bets and instead pursuing numerous small, varied growth opportunities. Not all will pan out, but embracing the risk of failure is necessary for success.

Executives must also recognize that human capital is the truly scarce resource today. Organizations need to manage their workforces as carefully and rigorously as they manage their financial assets, unleashing and supporting the talent within their organizations.

In Brief

What’s Changed?

For most of the past 50 years, business leaders viewed financial capital as their most precious resource. But today it is abundant and cheap.

What Does It Mean?

The skillful allocation of financial capital is no longer a source of sustained competitive advantage. More important is a workforce that can generate good ideas and translate them into successful new products, services, and businesses.

What Should Firms Do?

Companies should lower hurdle rates, make numerous small investments in growth opportunities, and pay more attention to managing their human capital well.

For most of the past 50 years, business leaders viewed financial capital as their most precious resource. They worked hard to ensure that every penny went to funding only the most promising projects. A generation of executives was taught to apply hurdle rates that reflected the high capital costs prevalent for most of the 1980s and 1990s. And companies like General Electric and Berkshire Hathaway were lauded for the discipline with which they invested.

A version of this article appeared in the March–April 2017 issue (pp.66–75) of Harvard Business Review.

Michael Mankins is a leader in Bain’s organization and strategy practices and a partner in Austin, Texas. He is a coauthor of Time, Talent, Energy: Overcome Organizational Drag and Unleash Your Team’s Productive Power (Harvard Business Review Press, 2017).
KH

Karen Harris is the managing director of Bain & Company’s Macro Trends Group and is based in New York.
David Harding is an advisory partner in Bain & Company’s Boston office and the former leader of the Global Mergers & Acquisitions practice. He is a coauthor of Mastering the Merger: Four Critical Decisions That Make or Break the Deal (Harvard Business School Press, 2004).

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Strategy in the Age of Superabundant Capital

In Brief

What’s Changed?

What Does It Mean?

What Should Firms Do?

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