Investment appraisal in action A Syngenta case study
Page 2: Reasons for investment
Business is about transforming inputs such as raw materials and labour into outputs. By adding value at each stage of the production process, a company hopes to generate a profit. This is when the revenue from the sale of the outputs exceeds the cost of the inputs. Profits are used to reward shareholders and can be reinvested in the business.
Syngenta adds value to its basic inputs of raw materials, labour and energy through its scientific knowledge base, manufacturing expertise and marketing know-how. It uses its scientific knowledge base to develop products that are effective in protecting crops from pests and diseases. Its manufacturing capability enables it to produce high quality products cost-effectively. Its marketing functions help the company to price, package, promote and distribute products to meet the needs of customers.
Reasons for investment
All businesses incur capital costs when buying or creating assets. These include plant, equipment, brands and knowledge. Spending money on capital assets is called investment. Although this is not essential expenditure in the short term, it is vital for long-term success. If a firm fails to invest then its products could become out-of-date or it may lose business to competitors that can deliver goods and services more efficiently. For example, in the last 20 years, every camera manufacturer has had to introduce new products as digital technology has replaced film as the medium for capturing images. Manufacturers that didn’t invest in new products went out of business.
There are three broad motives for capital investment:
renewal of worn out assets
acquisition of additional assets to expand the business and increase output
innovation to reduce costs and/or to create new value.
In practice, an investment often combines all three factors. It will aim to secure a competitive advantage for the organisation. This might arise from better technology, access to new markets or an exclusive innovation, such as Syngenta’s Amistar fungicide.