Academic journal article The McKinsey Quarterly

Current Research: Asset Management in Basic Materials

Academic journal article The McKinsey Quarterly

Current Research: Asset Management in Basic Materials

Article excerpt

EDUARDO CARVALHO, WIELAND GURLIT, SIGURD MAREELS, ENIO STEIN, AND SCOTT RUDMANN

The McKinsey Quarterly, 1996 Number 2, pp. 185-188

Research indicates that senior management of basic material industries must not only focus on optimizing yield but also on managing the cycle. To do this, they will need to develop a management team which possesses new skills, such as risk management, and which shares the same expectations about growth, returns, and cashflow.

Conventional growth strategies of companies in basic materials have proved extremely risky and destructive of value. Consider the results of 15 steel companies [ILLUSTRATION FOR EXHIBIT A OMITTED]. For reversing these results, excellence in all value levers is essential [ILLUSTRATION FOR EXHIBIT B OMITTED].

Consider one of these elements, cycle-based acquisitions. Asset trading seems to be an attractive opportunity for growth compared with greenfield investments. Companies' market value changes significantly along the cycle, leading to substantial value creation and growth opportunities. Counter-cyclical asset trading led BHP minerals to substantial growth, even amidst a severe downturn [ILLUSTRATION FOR EXHIBIT C OMITTED].

Research also indicates that investment decision rules based on NPV are misleading. …

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