Examples of Capital Intensive

Examples of Capital Intensive

Examples of Capital Intensive Jonathan Poland

An industry, organization, or activity that is capital intensive requires a large amount of fixed capital, such as buildings and machinery, in comparison to labor and other factors of production. This means that a significant portion of the resources used in these industries is invested in capital assets rather than in labor. Capital intensive industries tend to be more automated and rely on technology and machinery to produce goods or services, rather than relying on a large workforce. Examples of capital intensive industries include manufacturing, construction, and energy production.

Capital Intensive Industry

Capital intensive industries are industries that require significant fixed capital such as property, plant and equipment relative to their revenue level to be competitive. For example, airlines are capital intensive because aircraft are expensive.

Labor

It is common to measure capital intensity in terms of fixed capital per employee. For example, a consulting business that has $200,000 in fixed capital per employee versus a real estate investment firm that has $140,000,000 in fixed capital per employee with the latter being more capital intensive.

Productivity

Generally speaking, capital intensive businesses tend to have higher labor productivity. This is certainly true on a historical basis but is occasionally changed by new business models that are knowledge intensive. For example, a farm with $2 million in equipment and three workers would tend to have higher productivity than a farm with $200,000 in equipment and three hundred workers.

Capital Efficiency

Capital efficiency is the amount of net profit that is generated by a dollar of capital. Everything else being equal, businesses with less fixed capital are generally more attractive. For example, two restaurants have net income of $300,000 per year but one represents a fixed investment of $2 million whereas the other represents an fixed investment of $1 million. The $1 million dollar restaurant is less capital intensive and is probably a better investment unless revenues are about to collapse because the business isn’t sustainable for some reason.

Debt

Generally speaking, capital intensive businesses tend to take on significant debt. This makes a business less attractive because debt payments do not go away when business is slow. Debt can also leave a business exposed to interest rate risk, refinancing risk and exchange rate risk. A firm with a large debt may be profitable in an environment of high economic growth and low interest rates but then suddenly turn unprofitable in a recession or when interest rates go up. If debt is in a foreign currency, the business may be highly sensitive to changes in exchange rates.

Capital Spending

Capital needs to be continually maintained, repaired and replaced. This is another problem with capital intensive industries that can complicate investing. For example, an airline may look profitable until it suddenly announces that it needs to replace half of its fleet in the next three years.

Competitive Advantage

All else being equal, a business with less capital is more efficient than a business with more capital if they are achieving the same results in the same industry. However, there are nuances to this that are significant. It is common for companies to outsource virtually everything to reduce their capital. At some point this introduces competitive disadvantages that may render a business completely worthless. For example, a fashion brand that outsources marketing, manufacturing, logistics and customer service will have a difficult time controlling its customer experience such that it may simply fail on the market.

Knowledge Intensive Industry

A knowledge intensive industry is an industry that primarily relies on human capital, also known as talent. Such industries may have few fixed assets. For example, a law office that has relatively high revenue as compared to its meager physical assets such as furniture, fixtures and computers.

Labor Intensive Industry

A labor intensive industry is an industry with low productivity such that it requires a great deal of labor relative to revenue. This can be due to a lack of automation such as an agricultural crop that must be harvested by hand. It is also common for some service industries to be labor intensive because customers value service from employees that is time consuming. For example, full service restaurants are labor intensive.

Pricing 101 Jonathan Poland

Pricing 101

Pricing refers to the process of determining the value that a business will receive in exchange for its products or…

Program Risk Jonathan Poland

Program Risk

Program risk refers to the likelihood of a program failing to achieve its goals due to potential outcomes. This type…

Call To Action Jonathan Poland

Call To Action

A call to action (CTA) is a phrase or statement that is used to encourage a specific response or action…

Negotiation Jonathan Poland

Negotiation

Negotiation is a dialogue between two or more parties with the goal of reaching an agreement. It is a fundamental…

What is Big Data? Jonathan Poland

What is Big Data?

Big data refers to extremely large and complex datasets that are difficult to process using traditional data processing tools. These…

Legal Risk Jonathan Poland

Legal Risk

Legal risk is the risk of financial loss or other negative consequences that may arise from legal action or non-compliance…

The GSA Process 150 150 Jonathan Poland

The GSA Process

The General Services Administration (GSA) is an independent agency of the United States government responsible for managing and supporting the…

Research Skills Jonathan Poland

Research Skills

Research skills are abilities that enable individuals to effectively investigate, analyze, and communicate knowledge. These skills are essential for success…

Selling Points Jonathan Poland

Selling Points

Selling points are the key features or benefits of a product that make it attractive to potential customers. These selling…

Learn More

Business Experience Jonathan Poland

Business Experience

Business experience refers to any work experience, including paid employment, freelance work, and contributions to family businesses or personal entrepreneurial…

Adaptive Performance Jonathan Poland

Adaptive Performance

Adaptive performance is the ability of an individual to perform well in changing, uncertain, and stressful situations. This type of…

Budget Variance Jonathan Poland

Budget Variance

Budget variance is the difference between the budgeted amount and the actual amount spent on a department, team, project, or…

Operational Efficiency Jonathan Poland

Operational Efficiency

Operational efficiency can be defined as the ratio between the inputs to run a business and the output gained from the business. It is primarily a metric that measures the efficiency of profit earned as a function of operating costs.

Types of Infrastructure Jonathan Poland

Types of Infrastructure

In an industrial economy, the production of tangible goods and infrastructure plays a central role. This type of economy has…

Exchange Rate Risk Jonathan Poland

Exchange Rate Risk

Exchange rate risk, also known as currency risk, is the risk that changes in exchange rates will negatively impact the…

Capability Analysis Jonathan Poland

Capability Analysis

Capability analysis is the process of evaluating the capabilities of an organization, system, or process in order to identify its…

Strategic Planning Jonathan Poland

Strategic Planning

The strategic planning process is a systematic way for an organization to set its goals and develop the actions and…

Resource Efficiency Jonathan Poland

Resource Efficiency

Resource efficiency is the process of using resources in a way that maximizes their value and minimizes waste. This can…