The corporation is comprised of a portfolio of assets. Management
of the portfolio requires continual assessment of the relative value of
current and prospective assets.
The investment opportunity set includes all the investment opportunities available to the corporation. However, corporations, like individuals, can never know all the elements in their investment opportunity set. Thus, intelligence about the elements of this investment opportunity set is one of the critical determinants of success. Management must be judged, therefore, not only on their ability to value investment projects, but on their ability to obtain intelligence about the elements of the investment opportunity set.
This intelligence can be gathered from a wide range of sources, including
from within various divisions of the corporation (research and development,
marketing and sales, operations, finance, human resources, etc.).
This is an area where corporations could potentially make very effective
use of college interns, who are often very creative at identifying potential
investment opportunities. Corporations can also make use of consultants
from a wide range of backgrounds in both identifying new opportunities
and rethinking existing configurations of assets.
Identification of new investment opportunities (locating elements in
the largely invisible investment opportunity set) can come through brainstorming
sessions. However, once the ideas are on the table, it becomes important
to value the associated investment projects. This requires number
gathering and number crunching. Ultimately, the value of the project
is a complex combination of the cash flows generated by the project (both
positive and negative, and including impacts on existing cash flows, such
as from enhancing or cannibalizing sales of existing products and
services) and the cost of financing the project. The
cost of financing is overdetermined by a large array of factors, including
the corporation's business and political associations, the perceived relative
risk of the projects to be financed (and the firm as a whole), and the
sophistication of the financial institutions from which the funds to finance
the project will be acquired (or the degree to which the firm can self-finance
through retained earnings).