Managers consider a company’s strategic goals when making capital budgeting decisions. Strategic decisions by Apple, FedEx, Starbucks, and Starwood Hotels & Resorts to expand in Europe and Asia required a capital investments in several countries. The strategic decision by Verizon to enter the videoconferencing market required a capital investment in the form of the acquisition of BlueJeans. Amazon’s desire to enter the healthcare market led to its purchase of PillPack, Inc., as well as its entering into a collaboration with JP Morgan Chase and Berkshire Hathaway, called Haven. Gilead Sciences’ decision to develop Harvoni as a patented drug for the treatment of hepatitis C led to major investments in R&D and marketing. Porsche’s decision to offer an electric vehicle, the Porsche Taycan, required start-up investments to form an electric division and ongoing investments to fund the division’s research efforts.
Capital investment decisions that are strategic in nature require managers to consider a broad range of factors that may be difficult to estimate. Consider some of the difficulties of justifying investments made by companies such as General Motors, Google, and Uber in autonomous vehicle technology. Quantifying a potential benefit from these investments requires assumptions around ultimate robustness of the technology, regulatory approval, legal liability, change in consumer demand, and overall future direction of the transportation industry in light of the ongoing climate crisis. The potential benefit of this emerging technology is still difficult to assess. Managers must develop judgment and intuition to make these decisions.
Companies such as GlaxoSmithKline, in the pharmaceutical industry, and Intel, in the semiconductor industry, regard R&D projects as important strategic investments. The distant payoffs from R&D investments, however, are more uncertain than other investments such as new equipment purchases. On the positive side, R&D investments are often staged: As time unfolds, companies can increase or decrease the resources committed to a project based on how successful it has been up to that point. This feature, called real options, is an important aspect of R&D investments. It increases the NPV of these investments because a company can limit its losses when things are going badly and take advantage of new opportunities when things are going well. As an example, a pharmaceutical company can increase or decrease its investment in an R&D joint venture based on the progress of the clinical trials of new drugs being developed by the venture.