Q&A with Roger Wery. Capital projects are vital to a company’s strategy. Here’s why.

Roger Wery is a principal in PwC’s management consulting practice. He specializes in strategy, growth, and execution for a broad range of clients in the technology, services, software, and communications industries.

What role do capital projects play in an organization’s overall strategy?

It depends on the industry. Some industries like technology, with a highly virtual model, outsource everything — manufacturing, human resources, marketing, information technology — but their core competency.

However, they can also be massively capital intensive, especially biotechnology companies that invest heavily in R&D. That’s why your capital spending ultimately needs to serve your business strategy. It’s really about linking the corporate vision and strategy to the “so what?” for capital investment decisions.

In other words, capital investment decisions must have a return on that investment linked inextricably to corporate strategy. One manufacturing CFO, for example, told us that his capital investment decision hinged on a specific growth opportunity. Our research has shown that companies that make that kind of connection, linking capital spending directly to strategy, achieve the highest returns.

Similarly, a biotech company spends about 20 times what its peers do on R&D with returns that double the industry average. In essence, this company is transforming future technology into current technology as efficiently as possible via capital spending.

What about other industries?

Well, some industries are capital intensive by the very nature of the industry. For them, capital project delivery is an essential element of their business model and an essential component of the industry.

Resource extraction companies, for example, are involved in a constant cycle of exploration production, expansion, suspension, restart, and retirement activities, which requires the capital-intensive development of new facilities during the normal course of business.

For companies in other industries, however, capital project development activities are less constant. Utilities often recapitalize their generating stations as old units are retired or when regulations change. This can result in a 5-to-10 year period of intense construction activity, followed by a generation of operations and maintenance with relatively few major capital projects.

What are some of the challenges boards face in capital projects oversight within the overall framework of corporate strategy?

The tendency at many companies is to focus on regulatory and compliance requirements — leaving far less time for deliberation and debate around strategy. In fact, our research at PwC has found that 79 percent of directors would like to spend more time on planning and testing strategy than they have in the past.

Meanwhile, boards face new and increased pressure in their oversight role as stewards of stakeholder value in our current business environment fraught with economic uncertainly, accelerated business cycles, unexpected global supply chain vulnerabilities, and disruptive emerging technology.

Capital projects oversight requires that boards take a step back and look at the big picture to assess how capital projects support corporate strategy. And then boards will have a strong stake in tracking execution of that strategy. The intersection of capital projects and strategy brings goal-setting in a clearer, more realistic focus.

In fact, each time a company determines how best to enter new markets, reduce operating costs, expand production or extraction, speed products to market, or realign to meet changing customer expectations, the decision potentially includes an underlying capital-projects dimension.

What information do directors need to evaluate capital projects from a strategy perspective?

To start, they need an understanding of the business case for the project. What’s the rationale? How will it affect the company’s competitive position in the marketplace? What are the key assumptions underlying execution? What major risks could impede progress? How does this project fit within the company’s overall portfolio? What is the forecast for return on investment in both best and worst cases?

Can the same objective be achieved by acquiring this new facility or buying this new technology rather than building it in-house, from the ground up? What’s the difference in cost? What’s the difference in return for each scenario? And what does competitive intelligence reveal about each scenario? What about risk? Is it less risky to buy versus build?

Our research has shown that board oversight in seven key areas at pivotal stages of strategy development and execution — from concept to feasibility to implementation — can reduce the risk of capital projects missteps.

Ultimately, the fundamental question really goes back to this: Does this capital project achieve a significant sustainable source of competitive value?